Question:
Enron Corporation was a darling in the energy-provider arena, and in January 2001 its stock price rose
above $100 per share. A collapse of investor confidence in 2001 and revelations of accounting
irregularities led to one of the largest bankruptcies in U.S. history. By the end of the year, Enron’s stock
price had plummeted to less than $1 per share. Investigations and lawsuits followed. One problem area
concerned transactions with related parties that were not adequately disclosed in the company’s financial
statements. Critics stated that the lack of information about these transactions made it difficult for
analysts following Enron to identify problems the company was experiencing.
Required:
1. Obtain the relevant authoritative literature on related-party transactions using the FASB’s Codification
Research System. You might gain access at the FASB website ( www.fasb.org ). What is the specific
citation that outlines the required information on related-party disclosures that must be included in the
notes to the financial statements?
2. Describe the disclosures required for related-party transactions.
3. Use EDGAR ( www.sec.gov ) or another method to locate the December 31, 2000, financial statements
of Enron. Search for the related-party disclosure. Briefly describe the relationship central to the various
transactions described.
4. Why is it important that companies disclose related-party transactions? Use the Enron disclosure of the
saleof dark fiber inventory in your answer.
Answer:
Requirement 1
Generally accepted accounting principles require the disclosure of related-party transactions. The
required information is outlined in FASB ASC 850–10–50–1: “Related Party Disclosures–Overall–
Disclosure.”
Enron Corporation was a darling in the energy-provider arena, and in January 2001 its stock price rose
above $100 per share. A collapse of investor confidence in 2001 and revelations of accounting
irregularities led to one of the largest bankruptcies in U.S. history. By the end of the year, Enron’s stock
price had plummeted to less than $1 per share. Investigations and lawsuits followed. One problem area
concerned transactions with related parties that were not adequately disclosed in the company’s financial
statements. Critics stated that the lack of information about these transactions made it difficult for
analysts following Enron to identify problems the company was experiencing.
Required:
1. Obtain the relevant authoritative literature on related-party transactions using the FASB’s Codification
Research System. You might gain access at the FASB website ( www.fasb.org ). What is the specific
citation that outlines the required information on related-party disclosures that must be included in the
notes to the financial statements?
2. Describe the disclosures required for related-party transactions.
3. Use EDGAR ( www.sec.gov ) or another method to locate the December 31, 2000, financial statements
of Enron. Search for the related-party disclosure. Briefly describe the relationship central to the various
transactions described.
4. Why is it important that companies disclose related-party transactions? Use the Enron disclosure of the
saleof dark fiber inventory in your answer.
Answer:
Requirement 1
Generally accepted accounting principles require the disclosure of related-party transactions. The
required information is outlined in FASB ASC 850–10–50–1: “Related Party Disclosures–Overall–
Disclosure.”
