Auditing a Publicly Traded Company

Auditing a Publicly Traded Company
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MEMORANDUM
DATE: 25/7/2014
FROM: Joy Adamson
TO: Terry Williams, CEO, Bailey & Associates
SUBJECT: Share-Based Payment reporting and Special Purpose Entities (SPE) reporting

The aim of this memo is to provide a description of what as a team we will look to see whether the customer is consistent with the US GAAP. Special attention is paid to accounting treatment of share-based payment, as well as accounting consolidation theory as it relates to SPEs.
Share-Based Payments (SBPs)
SBPs are essentially those payments given to staff members on the basis of equity or share of the corporation. Share-Based Payments are transactions where the company receives services or goods either as incurring liabilities for amounts basing on the price of the shares of the company or other equity instruments of the company, or as consideration for its equity instruments. The accounting requirements for the SBP is dependent on how the transaction would be settled; that is, by the issuance of (i) cash or equity, (ii) cash, or (iii) equity (Deloitte, 2014).
In the accounting treatment of SBPs, share-based payments for the worker’s service will be revenue expenses of the corporation and would transfer to the company’s Profit and Loss (P&L) account. In accounting for share-based payment arrangements under the Generally Accepted Accounting Principles, a fair value-based method is essential whereby a corporation (i) obtains services/goods in exchange for issuing share options or other instruments of equity, or (ii) incurs liabilities which are partly based upon the price of its shares or which might necessitate settlement in its shares (Deloitte, 2014). As per the US GAAP, the fair value of the transaction refers to the amount at which the liability or asset could be sold or purchased in a current transaction between parties who are willing. The fair-value of the shares should be measured basing upon a market price or guesstimated with the use of an option-pricing model. Moreover, under the US GAAP standard, it is required that the entity discloses its fiscal statements in order to give investors adequate information to know the types as well as extent to which the organization is entering into SBP transactions. In valuing the transaction with non-employees, either the fair-value of the equity instruments granted or the services/goods received is used – any that is more reliably measurable (Ernst & Young, 2012).
Regarding equity repurchase features at the election of the worker, classification of liability is unnecessary if the worker stands risks and rewards of equity ownership for not less than 6 months from the time the shares are vest or issued. Deferred taxes are calculated...