Accounting 541: Audit of Share-Based Payment and Special Purpose Entities
MEMORANDUM
TO: Senior, Publicly Traded Company
FROM: Team B (Staff I)
DATE: February 4, 2013
SUBJECT: Audit of Share-Based Payment and Special Purpose Entities (SPE) Reporting
This executive memo is a summary and analysis of our audit findings for the client, a publicly traded company, and its financial practices. Please review this correspondence in accordance with your request. We look forward to meeting in person for further discussion and to make an informed recommendation about if this client’s policies are consistent with GAAP.
Share-Based Payment Reporting
In 2004 the Financial Accounting Standards Board (FASB) released Statement No. 123 that “established a fair-value-based method of accounting for share-based payment arrangements with employees that supplemented APB Opinion No. 25” (Financial Accounting Standards Board [FASB], 2004). Financial Reporting Standard 20 (FRS) requires accounting treatment be adopted by firms making share-based payments like our client and measure expenses, at fair value with respect to the share-based payments made.
The FASB addresses the accounting treatment of share-based payment transactions and reporting where Statement No. 123 requires the fair value of stock options and other shared-based compensation be subtracted from the earnings and reported as an expense on the financial statements. This statement also establishes uniform accounting practices and principles for all types of share-based payment reporting. Accounting for our client, a public enterprise is based on the fair value method for employee-shared payment plans and required to make fair value disclosures. Other factors to consider are the earnings-per-share, modifications, performance conditions, and the terms and conditions of the share-based payments according to FASB disclosing requirements (The Chartered Accountant, 2005).
Special Purpose Entities
Originally, a special purpose entity (SPE) was defined as “a partnership,
TO: Senior, Publicly Traded Company
FROM: Team B (Staff I)
DATE: February 4, 2013
SUBJECT: Audit of Share-Based Payment and Special Purpose Entities (SPE) Reporting
This executive memo is a summary and analysis of our audit findings for the client, a publicly traded company, and its financial practices. Please review this correspondence in accordance with your request. We look forward to meeting in person for further discussion and to make an informed recommendation about if this client’s policies are consistent with GAAP.
Share-Based Payment Reporting
In 2004 the Financial Accounting Standards Board (FASB) released Statement No. 123 that “established a fair-value-based method of accounting for share-based payment arrangements with employees that supplemented APB Opinion No. 25” (Financial Accounting Standards Board [FASB], 2004). Financial Reporting Standard 20 (FRS) requires accounting treatment be adopted by firms making share-based payments like our client and measure expenses, at fair value with respect to the share-based payments made.
The FASB addresses the accounting treatment of share-based payment transactions and reporting where Statement No. 123 requires the fair value of stock options and other shared-based compensation be subtracted from the earnings and reported as an expense on the financial statements. This statement also establishes uniform accounting practices and principles for all types of share-based payment reporting. Accounting for our client, a public enterprise is based on the fair value method for employee-shared payment plans and required to make fair value disclosures. Other factors to consider are the earnings-per-share, modifications, performance conditions, and the terms and conditions of the share-based payments according to FASB disclosing requirements (The Chartered Accountant, 2005).
Special Purpose Entities
Originally, a special purpose entity (SPE) was defined as “a partnership,
References: Ciesilski, J. A. (2009). Accounting for Special Purpose Entities Revised: FASB Interpretation 46(R). Retrieved Jan 28, 2013, from The CPA Journal: http://www.nysscpa.org/cpajournal/2004/704/essentials/p30.htm Colabella, P., Fitzsimmons, A., & Shoaf, Victoria. (2009, December - January 2010). New Guidance on Asset Transfers and Special Purpose Entities. Bank Accounting and Finance, (), 45-49. Financial Accounting Standards Board. (2004). Proposed statement of financial accounting standards. Retrieved from http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176157307155 Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2011). Financial accounting theory and analysis: Text readings and cases (10th ed.). Hoboken, NJ: Wiley. Summary of Interpretation No. 46. (n.d.). Retrieved Jan 27, 2013, from FASB: http://www.fasb.org/summary/finsum46.shtml The Chartered Accountant. (2005). Guidance note on accounting for employee share-based payments. Retrieved from http://www.icai.org/resource_file/10517jan05p928-929.pdf