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

14 Securities that are bought and held principally for the purpose of selling them in the near
term.
550. Enron had a division called Assets and Investments, which, among other things,
involved the building of power plants around the world, operating them, selling off pieces of them,
and investing in debt and equity securities of energy and technology-related businesses. Enron had
great discretion over the results it reported within its Merchant Assets area, according to a 3/01
article in Fortune,
"This [was] an enormous earnings vehicle, which [could] often be called upon when
and if market conditions require[d]," noted UBS Warburg analyst Ron Barone....
"[Others were] concerned they [were] liquidating their asset base and booking it as
recurring revenue, especially in Latin America, " said analyst Andre Meade at
Commerzbank ....
551. Enron recognized pretax gains from sales of merchant assets and investments totaling
$756 million, $628 million, and $136 million in 99, 98, and 97. Much of these gains were
improperly defined as having a readily determinable value such that unrealized gains could be
recorded as income.
552. However, GAAP, as set forth in SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, requires companies to record unrealized gains and losses on
investments in securities that do not have readily determinable values as a separate component of
stockholders' equity. SFAS No. 115, 127. Only unrealized holding gains and losses for trading
securities 14 that are readily determinable values shall be included in current earnings.
553. Under SFAS No. 115, the fair value of an equity security is readily determinable if
sales prices or bid-and-ask quotations are currently available on a securities exchange registered
with the SEC or in the over-the-counter market, provided that those prices or quotations for the
over-the-counter market are publicly reported by the National Association of Securities Dealers
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