Acc 541 - Auditing a Publicly Traded Company - Share-Based Payment and Special Purpose Entities Reporting

Auditing a Publicly Traded Company

ACC 541/Accounting Theory & Research

June 27, 2011

JoEtta Malone

Memorandum

TO: Senior Accountant

FROM: Team C

DATE: June 27, 2011

SUBJECT: Share-based Payment and Special Purpose Entities Reporting

In an audit it is necessary to see if the client is compliant with Generally Accepted Accounting Principles (GAAP) by checking the procedures used against the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC). More specifically, this memo will discuss the sections dealing with share-based payments and special purpose entity (SPE) reporting. Information on share-based payments for non-employees is found under ASC section 505, subsection 50 for equity-based payments. SPEs are found in ASC section 860, subsection 10 for transferring and servicing assets. Consolidation theory is contained in section 810.

Share-based Payments

To be consistent with GAAP in regard to share-based payments the company's records must show what rights are conveyed to the shareholder and the obligations of the company. The issuance of an equity instrument by the company for goods or services received may need to be accounted for over several periods. An asset, expense, or sales discount must be recognized in the same period as the issuance. The accounting is done as if cash, cash rebates, or sales discounts were used. If the share-based payment is made before the goods or service are received an asset may need to be recognized, but the goods or service are not recognized until received per ASC 505-50-25 (Financial Accounting Standards Board, 2011) (IFRS 2). If at the date of measurement the equity instrument is dependent on the market, fair value should be used for valuation regardless of the market conditions per ASC 505-50-30-28 (FASB, 2011) (IFRS 2). Application of this guidance to the share-based payments made as consideration for work performed should allow the auditors to determine the level of compliance with GAAP and recommend any changes in recording.

Special Purpose Entities

Special purpose entities (SPEs) have been around since the 1970s. The rules have gone from nonexistent for the SPE to changing several times because of the Enron fiasco. ASC 860-10-05-4 (IAS 140) helps to understand that when there is a transfer of financial assets the transferor sometimes will have continuing involvement with either the asset transferred or the with the transferee (FASB, 2009). According to ASC 860-10-50-3 disclosure is required for SPEs to help users of the financial statements understand a few items about the SPE. The first item is the transferor's continuing involvement in regard to the transferred financial assets. The next item is if there whether there are restrictions on any of the assets reported on the financial statements that relate to transferred financial assets,