What accounting method, used by Enron, records revenue from long-term contracts immediately?

What accounting method, used by Enron, records revenue from long-term contracts immediately? The answer is mark-to-market accounting.

Mark-to-market accounting measures an asset or contract at an estimated current fair value rather than waiting for all related cash flows to occur. For certain long-term energy contracts, Enron recorded the estimated present value of expected future profits when contracts were signed, treating those projections as current earnings.

The method can be legitimate when fair value is supported by observable market prices. Enron’s difficulty was that many contracts extended for years and lacked active markets. Their values therefore depended heavily on internal assumptions about future prices, costs and demand, giving management substantial room to overstate profits.

This is not the same as cash accounting, which recognizes transactions when cash changes hands, or accrual accounting, the broader principle of recording economic events when earned or incurred. Mark-to-market also does not guarantee that a projected gain will ever become cash. Enron’s aggressive use of estimates became a major feature of the accounting scandal that preceded its 2001 collapse.