Executive Memo to the Board

To: Board of Directors

From: UoPx CPA Auditors

Subject: GAAP Requirements and Accounting Treatment for Share-Based Payment Reporting and Consolidation of Special Purpose Entity

Week 6 Points to consider Memo on SPE and Share-based payments

Evaluate Share-based payment reporting

JJH->Share-based employee compensation awards are classified as either equity instruments or liability instruments. The measurement date for estimating the fair value of equity instruments is the grant date; the measurement date for liability instruments is the settlement date. Different rules also apply to public vs. private companies depending on the type of award instrument. (Executive summary, Paragraph 2)

http://www.journalofaccountancy.com/Issues/2007/Apr/ARoadMapForShareBasedCompensation.htm

Three features to help identify a share based transaction with employee program:

1. Employees that are shareholders are granted additional benefits Additional benefits indicate the entity is dealing with the individuals as employees or providers of services rather than as investors or equity holders. Examples of additional benefits include: • Employees have the right to additional shares if the business performs well (often referred to as a ratchet mechanism). • Employees’ rights depend on whether the entity floats or is sold through a trade sale (ie, in the event of a trade sale an employee may automatically get a cash payment or a number of shares).

2. The arrangement incorporates ‘leaver conditions’Such conditions indicate the entity is dealing with the individuals as employees or providers of services rather than as investors or equity holders. For example, the employee only receives the shares if they remain an employee or if they are required to sell their shares back to the entity when they resign.