Acc 541 – Auditing a Publicly Traded Company – Share-Based Payment and Special Purpose Entities ReportingEssay Preview: Acc 541 – Auditing a Publicly Traded Company – Share-Based Payment and Special Purpose Entities ReportingReport this essayAuditing a Publicly Traded CompanyACC 541/Accounting Theory & ResearchJune 27, 2011JoEtta MaloneMemorandumTO: Senior AccountantFROM: Team CDATE: June 27, 2011SUBJECT: Share-based Payment and Special Purpose Entities ReportingIn 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 PaymentsTo be consistent with GAAP in regard to share-based payments the companys 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 EntitiesSpecial 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 transferors 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,
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A special purpose entity can be created with an ASC 860-10-49-16-0 or the current EISA standard-setting rules. The ASC 860-10-50-4-3-2 section explains. These rules define how a special purpose entity can be created. For example, SPEs may contribute to funds raised in a special purpose entity or a fund’s owner. A special purpose entity may share in, or participate in, funds in and the owner of an entity will pay for the special purpose entity’s own share of the funds raised. As the name suggests, a special purpose entity will not be required to provide, nor have been required to provide, any information regarding the purpose of the entity.
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A fund’s owner (and the shareholders) will also be the person’s sole financial adviser and/or trustee for the fund. Any other financial adviser, trustee or other financial person who may be deemed within a special purpose entity would be considered as being responsible for the fund’s financial statements or for any other financial person in or on whose behalf the fund was created. Aspects of a fund’s assets include cash, cash equivalents, notes, savings and financial instruments. These financial advisors and/or employees provide an advisory, management and oversight view of an asset. If these investment advisors or employees do not be designated as financial advisors, they may be considered nonfinancial advisors or less likely to make investment decisions (see appendix D to this specification). These nonfinancial advisors or employees often provide financial services to the fund, have direct financial interests in the fund and are paid only for these services (as opposed to directly for the fund’s financial investments or any other financial services). Any other financial person who may be identified within a special purpose entity is considered merely to monitor, manage an investment as a member of the fund or the beneficiaries of a special purpose entity (see appendix D to this specification). Any other legal persons or entities that may have direct financial interests in the fund are not considered as financial persons. If no one with direct financial interests in the fund is to be credited with the fund (or the person’s direct investment can not be credited without the prior permission of financial advisors or other financial persons that may be designated as financial advisers or less likely to make investment decisions), then this person or entity will be considered to have done nothing to improve its financial position and any other assets owned or controlled by this person can be considered financial property.
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In addition, if a fund makes a payment for a business or other assets, it usually must disclose such information to the committee and to the tax collector in a timely manner in the form approved by the committee. This would require the disclosure of the entire payment to the committee as needed.
In the event that a particular transfer of financial assets had been made within the 10-year limit, the transfer is recorded and the fund shall not be required to maintain such financial information.
If, however, if the transfer were made within the current year, and