Enron was one of the world’s largest power companies before it went bankrupt in one of the most spectacular financial frauds in history. One aspect of the fraud involved the creation of a separate entity that borrowed a large amount of money and then used the money to acquire facilities, which were then leased and used by Enron. Because Enron owned less than 50 percent of d dock of the separate entity, Enron w not required to include the entity in its consolidated financial statements. This arrangement was attractive to Enron management because the company did not have to report the huge debt held by the entity on its consolidated balance sheet. The arrangement was deceptive to shareholders an potential investors because they were unaware of this debt, which turned out to be the responsibility of Enron. Recently, the FASB issued a standard requiring companies to include such separate entities in their consolidated financial statements.
REQUIRED:
Describe the economic entity assumption, and provide reasons why the FASB is requiring the consolidation of such entities. Do you think that the separate entity should have been considered part of the economic entity called Enron? Why?