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likewise required the Insiders to re-determine each underperforming asset’s fair value and changeEnron’s financial statements to recognize the loss.201. But it quickly became clear to the Insiders that the size and number of Enron’s assetfailures ran the risk of toppling Enron’s credit rating. Therefore, the Insiders created FAS 140transactions as an alternative: Instead of re-valuing the asset on Enron’s financial statements andrecognizing the loss, the Insiders ostensibly transferred the asset into a structure that purportedlyqualified for sale reporting pursuant to FAS 140. The Insiders then moved the asset off the balancesheet, used the cash to operate the company, and – for the time being – resolved the valuationproblem.202. Between 1998 and the Petition Date, Enron participated in more than forty FAS 140transactions. The manner in which the Insiders caused Enron to report a large number of themviolated GAAP. Usually, the SPE structure into which the asset was transferred did not meet therequirements for reporting the transfer pursuant to FAS 140. Moreover, reporting the transactionsas if they involved FAS 140 structures failed to fairly present in all material respects Enron’sfinancial position, results of operations, and cash flows.203. FAS 140 is inapplicable unless the asset being transferred is isolated from thetransferor such that it cannot be reached by the transferor’s creditors in bankruptcy. An asset is notisolated if it is transferred to an SPE that should itself be consolidated on the transferor’s financialstatements. The question of consolidation is therefore crucial to FAS 140 accounting treatment.204. FAS 140 incorporates accounting guidelines that address aspects of the question ofconsolidation. These guidelines have created a “prevailing practice” with respect to consolidatingSPEs. The prevailing practice – in accounting jargon, “the 3% equity rule” – is the equivalent ofa requirement. As the Enron Examiner explained, the rule means an SPE must be consolidated604041v1/007457-56-