Accounting position papers and technical memos

Auditors read memos in a consistent order, so a memo that follows it saves time. Ours runs:

1. Issue. The question in one sentence, such as whether a SAFE is a liability under ASC 480.
2. Background and facts. What happened, with the clause or document reference for every fact, and the dates.
3. Guidance considered. The Codification paragraphs, or IFRS paragraphs for a group reporting pack, that apply, including ones considered and set aside.
4. Analysis. Each term of the transaction run against each test, in the order of the guidance.
5. Alternatives. The other reasonable readings, and why they were not chosen.
6. Conclusion. One paragraph, stated in management's voice.
7. Accounting entries and effect. Journal entries and the statement lines they move.
8. Disclosures. Draft footnote text and the source file index.

The memo ends with a line for management's approval and a date. We leave that line unsigned. Your controller reviews and signs it, because the conclusion is management's.

Sometimes, and it depends on who is being audited. The audit firm's independence rules decide what it can do, not the preference of the finance team.

For a company that files with the SEC, 17 CFR 210.2-01(c)(4) says an accountant isn't independent if it provides bookkeeping or other services related to the accounting records or financial statements, or appraisal or valuation services, to an audit client, unless it is reasonable to conclude the results won't be subject to audit procedures. A position paper the auditor writes is the kind of work the auditor then tests, so a registrant's own staff, or someone other than its auditor, prepares the memo.

For other companies the AICPA's Code of Professional Conduct, section ET 1.295.040, governs nonattest services. As the Journal of Accountancy summarizes it, the client must assume management responsibilities, designate a person with suitable skill, knowledge or experience to oversee the work, evaluate its results and accept responsibility for them. An audit firm can often provide the service within those safeguards; a company that wants the analysis kept apart from its auditor uses a separate preparer. Ask your auditor what it will accept before you commission the memo.

Anything that is unusual, large or judgmental. The usual candidates:

• Equity awards and profits interests. Scope, classification, modifications. See stock compensation under ASC 718.
• Business combinations and asset purchases. Whether the target is a business, the allocation and the private company alternatives. See purchase accounting.
• Convertible instruments. SAFEs, notes and warrants. See convertible instrument accounting.
• Goodwill and long-lived assets. Triggering events and the fair value model. See impairment testing.
• Revenue contracts. Unusual termination rights, bundles and licenses. See revenue recognition under ASC 606.
• Leases. Modifications and embedded leases. See lease accounting under ASC 842.
• Debt. Modifications, extinguishments and amendments with fees.
• Related-party and common-control transactions.

A memo is also the cheapest way to settle a recurring judgment once. If the company will see the same SAFE or the same contract pattern every quarter, the memo becomes the policy.

SAS 143, Auditing Accounting Estimates and Related Disclosures, issued in July 2020, is effective for audits of financial statements for periods ending on or after December 15, 2023. Per the GAO's Professional Standards Update, it addresses the auditor's responsibilities for accounting estimates, including fair value estimates and related disclosures, and for evaluating misstatements and indicators of possible management bias. SAS 144 amended AU-C 501, 540 and 620 for the use of specialists and pricing information from external sources, with the same effective date.

For a memo, that means the estimate behind any number has to be traceable. We build the memo so an auditor can see:

• The method, and why it fits the instrument.
• The data, with its source and a note on completeness.
• The assumptions, each with support or a note that it is management's judgment.
• The specialist, when a valuation or actuarial input comes from one, named and dated.
• Consistency with prior periods, and a reason for any change.

A memo with a bare conclusion forces the auditor to rebuild the analysis. A memo with the inputs documented lets the auditor test them. IFRS-reporting subsidiaries get the same treatment, since the group auditor will ask for the same file.

Send the auditor's request, the executed documents the question rests on, the relevant board or committee minutes, the cap table or ledger extracts, and any valuation or actuarial report. A short call with the controller sets the question and the date the auditor needs the memo.

You get back a draft memo in Word, a supporting workbook for any calculation, the proposed journal entries and the draft disclosure text. We answer reviewer comments from your controller until the draft is settled. If the auditor then raises a follow-up question, we prepare the response for your controller to send.

Turnaround depends on the number of transactions and the state of the documents, and we confirm it in writing when the scope is agreed. We don't promise reply times in advance. If your group auditor needs memos in IFRS terms, the IFRS reporting pack service shows how the bridge fits around them.

A memo doesn't bind the auditor. Auditors can and do reach a different view, and when they do the memo is the document the discussion starts from.

It doesn't give legal advice. If the right answer depends on how a contract term will be read in court, the company's lawyer answers that, and the memo states the assumption it took.

It doesn't stay current by itself. Facts change: a note is amended, an award is modified, a forecast slips. A memo is a dated analysis of a dated set of facts, and we mark which later events would need it refreshed.

And it isn't an opinion. Finbryn issues no audit, review or attest report and no opinion on the financial statements. The company's statements remain management's, and the company's auditor reports on them.