Share-Based Payment and Special Purpose Entity Reporting Memo

MEMORANDUM

TO: Senior Accountant

FROM: Accountants

DATE: May 6, 2013

SUBJECT: Share-Based Payment and Special Purpose Entity Reporting

CC: Board of Directors

As auditors of a public traded company, our goal is to evaluate both share-based payment reporting and special purpose entities (SPEs) for our client. Below is our research on the advantages and disadvantages of both share-based payment and SPEs reporting in accordance to Generally Accepted Accounting Principles (GAAP). As auditors we will pay particular attention to accounting treatment of share-based payment reporting and accounting consolidation theory as it relates to special purpose entities.

Share-Base Payment Reporting According to GAAP

Share-base payment reporting addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for equity, liabilities based on the fair value of the enterprise’s equity instruments or settled by the issuance of such equity instruments.Share-based payment is to specify the financial reporting by an entity for the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees. The requirements for the share-based payment depend on how the transaction is settled such as by the equity, cash, or by both. Shared-based payment arrangements will provide investors and other financial users with extra complete and balanced financial information by having the compensation cost relate to the share- based payment acknowledged on the financial statement. 1

Share-Base Payment Accounting Treatment

FASB ASC 718 (formerly SFAS No. 123R) requires all companies to expense the value of employees’ stock options, and recognize compensation cost from share-based payment arrangements. FASB ASC 718-10-25 states that a company should recognize the services received in a share-based payment transaction as an employee receive services,...