Auditing Paper

This memorandum will provide information pertaining to share-based payment reporting and special purpose entities (SPE) reporting. A description of what to look for to see if the client is consistent with the generally accepted accounting principles (GAAP) will be provided, while focusing on accounting treatment of share-based payment and accounting consolidation theory as it relates to special purpose entities.

A special purpose entity (SPE) has certain rules to follow to meet or exceed generally accepted accounting principles (GAAP). A special purpose entity can be a partnership, corporation, trust, or joint venture created for a limited purpose, limited life, limited activities, designed to benefit a single company (Schroeder, Clark, Cathey, 2011). Previously, GAAP standards were under SFAS No. 13, but companies were able to keep capital leases on off-balance sheet and avoid consolidation. The qualifications for non-consolidation of an SPE are updated in SFAS No. 140, and the following three conditions have to be met:

The first condition suggests that the transferred assets be put beyond the reach of the transferor and its creditors. The second condition suggests that each transferee (SPE) has the right to pledge or exchange the assets, and no conditions constrained the transferee from taking advantage of its right to pledge or exchange. The third condition suggest that the transferor do not maintain effective control over the transferred assets through either (1) an agreement that entitled and obligated the transferor to repurchase or redeem the transferred assets before maturity of (2) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call (Schroeder, Clark, Cathey, 2011, p. 530).

This ensures companies recognize an asset it controls and unrecognized a liability when the liability no longer exists (Schroeder, Clark, Cathey, 2011). The FASB further defines how to address an asset when a company...