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Author Archive

02
Apr

History indicates that smaller reporting companies, development and exploration stage entities, and any other small business with little capital rely heavily on meeting their obligations, of all varieties, via the issuance of common stock . Reviews of 100’s of public company filings and contractual agreements reveals the interpretation of agreement terms and GAAP application may not always seem to be consistent with the economic substance of an individual transaction. Consider the following example: Company A issues 1,000,000 shares to Consultant Z to receive consulting services for a period of 24 months.  The agreement describes a variety of tasks the consultant is going to perform, but there are no specific performance milestones, essentially providing for Consultant Z to earn the shares with the passage of time, assuming task performance.  On the grant date, January 1, 2012, the 1,000,000 shares have a fair value of $500,000. Additionally, Consultant Z must forfeit the “unearned” shares for non-performance in the event of early termination of the arrangement.  Upon early termination, Company A has the right to cancel the unearned shares without additional significant financial consequence enforceable against Consultant Z. Over the term, the value of the shares is perpetually $0.10 higher at the end of the month than the beginning (e.g. 1/1/12 = $0.50; 1/31/12 = $0.60; 2/28/12 = $0.70; etc. to $2.90 at 12/31/13) Frequent Recognition (Restatement Exposure): Company A Grant Date Entries: Debit Credit Prepaid   Consulting Fees $500,000   Stock and Paid in Capital $500,000   On January 31, 2012 and the remainder of the 24 month term, Company A recognizes the following: Debit Credit Consulting   Expense $20,833 Prepaid   ...

18
Mar

The PCAOB recently issued its report on inspections of smaller audit firms from 2007-2010.  In addition to citing some statistical information, the PCAOB identified some specific areas of audit deficiencies. While the PCAOB only provides oversight of audit firms, the SEC’s Corporation Finance staff frequently issues comments in the same areas, often resulting in costly restatements. In addition to the high level overview of some of the issues identified in the PCAOB’s report as noted below, future posts will provide a more in-depth discussion of the issues, samples of actual comments, and an intro into the approaches that we have previously used in getting the items resolved. The primary deficiencies that could impact issuers are as follows: Revenue recognition – this area has been a hot-button issue with the SEC since the beginning of time.  Areas of frequent comment relate to the four basic criteria as published in Topic 13 of SEC’s Staff Accounting Bulletins (“SAB”).  Many times the required milestones appear to have been met within the period, for example the receipt of the payment, but within the world of GAAP it does not always mean recognition is appropriate.  Additionally, issuers will disclose their accounting policy simply as the four basic criteria, not providing much useful information as to how it is applied on a specific transactional basis.   Share-based payments and equity financing instruments – For smaller reporting companies, with limited cash resources, being able to negotiate share-based payments with vendors is crucial to survival.  Slight nuances in terms could result in radical differences in treatment.  One frequent and important recognition criteria for share-based payments is the service provider consequence for non-performance has to be significantly greater than the share forfeiture, even with the threat of litigation.  In these situations, the application of the guidance can result in recognition that does not always ...

08
Mar

Ingenium Accounting Associates, a PCAOB and CPAB (Canada) registered accounting Firm, is pleased to announce its new blog, known as “Closing the GAAP.”  The Blog’s objective is to promote an active dialogue surrounding operational, accounting, and financial reporting topics impacting small to mid-size businesses in all industries. Seemingly straight forward transactions can require potentially unknown GAAP application.  This application may require unanticipated recognition within your  financial statements.    These discussions are intended to minimize unknown financial reporting consequences, hence "Closing the GAAP". In upcoming posts we will provide examples and case studies of transactions we have encountered that could be applicable to a broad range of companies. We strongly encourage sharing experiences and opinions.