Understanding Accounting
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Lesson

Reconstruct entities, related parties, and economic exposure

Keep legal entity, accounting scope, contract, disclosure, control, and economic risk separate while tracing structured transactions.

Updated Aug 7, 2026 Review due Nov 7, 2026
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  1. Keep six questions separate
  2. Apply the map across three stories
  3. Related does not mean automatically wrong
  4. Practice and exit check
About this lesson

Lesson details

Estimated study time
105 min
Learning objectives (6)

An entity omitted from a balance sheet has not necessarily disappeared from the economics. An entity included in consolidated statements has not necessarily made every related-party conflict harmless. Start with a map rather than a label.

Keep six questions separate

  1. Legal entity: who signed, owns property, owes cash, or can be sued?
  2. Control and accounting scope: which reporting entity recognizes or consolidates which rights and obligations under applicable criteria?
  3. Contract and support: who guaranteed, collateralized, funded, committed, or promised to repurchase?
  4. Cash and benefit: who supplied cash, received it, used assets, or received upside?
  5. Disclosure and governance: which relationships, terms, conflicts, approvals, recusals, and concentrations should decision makers know?
  6. Economic exposure: who loses when values, funding, counterparties, or assumptions move adversely?

These columns may point to different parties. That is the reason to preserve them.

Apply the map across three stories

In Enron, select an arrangement described in the SEC complaint and apply the six questions directly: identify each legal entity; control and accounting scope; contractual support; cash and benefit flows; disclosure and governance; and downside economic exposure. The learning objective is not memorizing an acronym; it is recognizing when claimed independence and risk transfer require deeper evidence.

In Adelphia, apply the same six questions to co-borrowing and family-controlled entities. The legal borrower; control and accounting scope; guarantees and support; cash beneficiary; disclosure and governance; and downside loss bearer can differ. Request the facility agreement and draw-level cash tracing before converting a reported number into a credit conclusion.

In Lehman's Repo 105 history, apply the six questions across time as well as parties. Securities move, cash is used to reduce a liability, the balance sheet is reported, and the transaction reverses. Legal entity and accounting scope, contract support, cash benefit, disclosure and governance, and continuing economic exposure must all be shown before and after the reporting date.

A founder-owned building can be leased to the company on supportable terms with independent approval and complete disclosure, or on unfavorable terms under a conflicted process. “Related” identifies information and governance risk; it does not mechanically select an accounting conclusion. Compare terms, substance, alternatives, beneficial ownership, approvals, recusal, and subsequent behavior.

Practice and exit check

Complete Choose the related-party governance response and Reconstruct economic exposure. For the exit check, take one transaction and produce a six-column map. If two columns contain the same answer, explain why rather than copying it by default.