Auditing Special Purpose Frameworks: Stockholders' Equityby
When an entity redeems or acquires shares of its own stock, the transactions are usually recorded as capital transactions. Management can elect one of two methods of accounting:
- Cost method.
- Constructive retirement method.
The cost method is similar to the treasury stock method under U.S. GAAP, in that shares are carried at cost and reported as a deduction from stockholders' equity or as treasury stock. When reacquired shares are sold, amounts received in excess of cost are treated as paid-in capital. Any deficiency should be charged to additional paid-in capital related to the previous issuance of the stock, with any excess amounts charged to retained earnings. If shares are retired or cancelled, their cost is allocated to the appropriate capital stock or additional paid-in capital accounts.
Under the constructive retirement method, the aggregate par or stated value of the acquired shares reduces the capital stock account, with any excess amounts paid charged against paid-in capital. Subsequent retirement or cancellation of the shares would require no further accounting.
Dividends should be recognized when declared and should only be provided for outstanding shares.
Accounting for Stock and Equity Compensation
The FRF for SMEs does not recognize compensation expense when stock or other equity compensation is issued. Certain disclosures are required, however. When options are exercised, they are recorded as a normal stock issuance, equity transactions.
Equity transactions with non-employees are recognized when goods or services are received by an entity. Such transactions are measured based on either the value of the goods or services received or the equity instruments exchanged, whichever valuation is most appropriate.
Auditing equity transactions under the FRF for SMEs will be similar to auditing equity under other financial reporting frameworks. Beginning with confirmations with registrars or inspections of stock record books, support for all transactions will be inspected (sampled if they are numerous) to determine whether either the cost method or constructive retirement method has been accounted for properly. Reading and excerpting minutes of directors' meeting and reading other correspondence with shareholders and employees may identify equity transactions that have not been recognized in the accounting records. Reading any stock compensation agreements will provide information for disclosure of these arrangements.
Other Resource Materials
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