Auditing Special Purpose Frameworks - Part 8: Stock-based Comp, Business Combinations, and More

Read more from Larry Perry here and in the Today's World of Audits archive.

Continuing to lay a foundation for developing audit strategies and audit plans, this article presents more comparisons of significant requirements in US GAAP and the AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs). 

This article presents comparisons of these topics:
  • Stock-based Compensation Plans
  • Consolidation and Subsidiaries
  • Business Combinations
  • Push-Down Accounting
Stock-based Compensation Plans
US GAAP: This form of compensation may be accounted for as either a liability or equity amount, depending on management’s intentions, at fair values. Fair value will be determined based on this hierarchy:
  1. A fair value accounting method when it can be reasonably determined.
  2. Calculated value method if it can be reasonably estimated.
  3. Intrinsic value method when neither of these methods can be used.
FRF for SMEs: This framework requires only footnote disclosures for such plans. The disclosures include:
  • The terms of awards under the plan.
  • Vesting requirements.
  • The maximum terms of options granted.
  • Separate disclosures for multiple plans.
Consolidation and Subsidiaries
US GAAP: An entity having a controlling financial interest (normally more than 50 percent ownership) in another entity is required to consolidate the subsidiary. When the entity cannot maintain significant influence over the operation of the subsidiary, such as in the case of external events like bankruptcy, the subsidiary would not be consolidated. For investments in variable interest entities, investors who have the power to significantly influence the operations of such entities will usually be deemed “primary beneficiaries.” In such circumstances, primary beneficiaries are required to consolidate variable interest entities. Either the equity method or cost method would be used otherwise.
 
FRF for SMEs: Management can elect to consolidate more than 50 percent-owned subsidiaries or account for them using the equity method (if it exercises significant influence over the entity). When significant influence is not exercised over the subsidiary, the cost method should be used to report the investment. Equity and debt securities that are available for sale, however, should be recognized at market values with changes in such values included in periodic net income.  

General disclosures include:

  • Consolidation policy.
  • When consolidated, the names of all subsidiaries, income from each, and the percentage of ownership.
  • Descriptions of the periods for subsidiaries’ financial statements that don’t coincide with the parent’s reporting date, along with any significant events or transactions in the intervening periods.
  • When financial statements are not consolidated, method of accounting for its subsidiaries, descriptions, names, carrying amounts, income, and percentage of ownership for each.

 

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