Enron Corp. - University of California | Office of The President

492. Enron sold 30 million shares of its stock to Raptors II and IV in exchange for those
entities increasing their payables to Enron (and Enron's receivables from them) by $850 million.
Enron improperly recorded an increase to notes receivable and to equity rather than offsetting the
notes against equity as required by GAAP.
493. Enron had also improperly accounted for the Enron shares sold in 4/00 to Talon
(Raptor I), in exchange for a $172 million promissory note, as an increase to "notes receivable" and
to "shareholders' equity." This increased shareholders' equity by $172 million in Enron's 2ndQ, 3rdQ
and 4thQ 00 financial reports. Enron made similar entries when it sold Enron stock contracts in 3/01
to Timberwolf and Bobcat (Raptors II and IV) for notes totaling $828 million. This accounting
treatment increased shareholders' equity by a total of $1 billion in Enron's 1stQ and 2ndQ 01
financial reports. GAAP, as set forth in EITF No. 85-1, Classifying Notes Received for Capital
Stock, requires that except in very rare circumstances, notes received in payment for stock should
be recorded as a reduction in shareholders' equity:
The SEC requires that public companies report notes received in payment for
the enterprise's stock as a deduction from shareholders' equity. Task force members
confirmed that the predominant practice is to offset the notes and stock in the equity
section. However, such notes may be recorded as an asset if collected in cash prior
to issuance of the financial statements.
494. In the 2ndQ 00 and the 1stQ 01, Enron issued $1.2 billion in common stock in
exchange for a note receivable to capitalize Raptors I-IV. Notwithstanding the basic requirement
that such transactions should be accounted for as a reduction in shareholders' equity, Enron recorded
the notes receivable as assets. Enron has admitted that its 00 financial statements included
overstated assets of $172 million for notes receivable that should have been recorded as an offset to
equity and that, "as a result of these errors, shareholders' equity and notes receivable were overstated
- 351 -