The NASPP Blog

For today’s blog entry, I have a couple of follow-up tidbits related to the recent EITF decision on accounting for awards with performance periods that are longer than the time-based service period.  I know you are thinking: “Yeesh, it was bad enough the first time, how much more could there be to say on this topic!” but you don’t write a blog.

Background

To refresh your memory, this applies to performance awards that provide a payout to retirees at the end of the performance period contingent on achieving a non-market condition target (in other words, just about any goal other than stock price or TSR targets). Where awards like this are held by retirement-eligible employees, the awards will not be forfeited in the event of the employees’ terminations but could still be forfeited due to failure to achieve the performance targets.  The service component of the vesting requirements has been fulfilled but not the performance component.

This also applies to awards granted by private companies that vest based on both a time-based schedule and upon an IPO/CIC.

The EITF came to the same conclusion you probably would have come to on your own. Expense is adjusted for the likelihood that the performance conditions will be achieved; as this estimate changes throughout the performance period, the expense is adjusted commensurately until the end of the period, when the final amount of expense is trued up for the actual vesting outcome. (See “Performance Award Accounting,” April 15, for more information.)

The IASB Does It’s Own Thing

I thought it was just a few maverick practitioners that had taken an opposing position.  The alternative approach (which the EITF rejected), is to bake the likelihood of the performance condition/IPO/CIC being achieved into the initial fair value, with no adjustments to expense for changes in estimates or outcome (akin to how market conditions are accounted for).

It turns out, however, that the IASB is one of the maverick practitioners that takes this position.  Apparently, the IASB thinks that option pricing models can predict the likelihood of an IPO occurring or earnings targets or similar internal metrics being achieved.  Which makes this another area were US GAAP diverges from IFRS. Just something to keep in your back pocket in case conversation lags at the next dinner party you attend.

Mid-Cycle Performance Grants

As I was reading Mercer’s “Grist Report” on the IASB’s decision, I noticed that they also had made a determination with respect to grants made in the middle of a performance cycle. These are typically grants made to new-hire employees.  For example, the performance cycle starts in January and an executive is hired in February.  All the other execs were granted awards in January at the start of cycle, but the newly hired exec’s award can’t be granted until February.

Under ASC 718, the grant to the newly hired exec is accounted for just like any other performance award.  True, his award will have a different fair value than the awards granted in January and the expense of the award will be recorded over a shorter time period (by one month) than the other execs’ awards. But where the award is contingent on non-market conditions, the expense is adjusted based on the likelihood that the goals will be met and is trued up for the actual payout, just like any other performance-conditioned award.

The same treatment applies under IFRS 2, but only if the performance-conditioned award is granted shortly after the performance cycle has begun. Awards granted farther into the performance cycle (in my example, if the exec were hired in, say, June, rather than February) are accounted for in the manner applicable to market conditions (i.e., the vesting contingencies are baked into the initial grant date fair value, with no adjustment to expense for changes in estimates or outcome), even if the targets are internal metrics.

Hmmmm. I’m starting to wonder if discussions like this explain the dearth of dinner parties in my life.

Thanks to Susan Eichen at Mercer for bringing the IASB’s decision to my attention and for explaining the IASB’s positions with respect to mid-cycle performance grants.

– Barbara