Last week, I blogged that the FASB has issued the exposure draft of the proposed amendments to ASC 718. In this week’s blog entry, I cover some of the additional issues addressed by the amendments.
Cash Flow Statement
The proposed amendments suggest changes to how a couple of items should be categorized in the cash flow statement. Most significantly, excess tax benefits realized from stock plan transactions would be presented as an operating activity. Currently, excess tax benefits are reported twice in the cash statement: as a cash inflow in the financing activities and a cash outflow in operating activities. In her “Meet the Speaker interview” last summer, Ellie Kehmeier highlighted the failure to do this as a very common error that companies make, so this change will clearly be helpful.
Private Companies
It is often very difficult for private companies to estimate the expected term of option grants. To assist with this, the proposed amendments would allow private companies to use a method similar to simplified method allowed under SABs 107 and 110. I think a lot of private companies are already doing this, so I’m not sure how revelatory this is. Also, the FASB imposes the same limitations that the SEC does, (i.e., the approach can only be used for options that are exercisable for only a short time after termination of employment), making this somewhat less than helpful.
The FASB is also under the impression that there are a bunch of private companies with liability awards that did not know that they could have elected to value these awards using the intrinsic value method back when they adopted the standard and are now stuck with using the fair value method for them. The proposed amendments would give these companies a one-time opportunity to change the measurement of liability awards from fair value to intrinsic value without having to justify the change.
I don’t encounter a lot of liability awards at either public or private companies, so I am skeptical about how helpful this is, but maybe there are a bunch private companies that just cannot wait to change over to the intrinsic value method for their liability awards. Assuming they are paying attention and don’t miss this opportunity. Considering that they apparently already missed the opportunity once, I’m not optimistic. Are we going to have to go through this all again in another ten years? Maybe the FASB should just give private companies a free pass on changing the valuation method for liability awards once every ten years so we don’t have to discuss this again.
FSP FAS 123(R)-2
In somewhat more exciting news, the amendments would make permanent the guidance in FSP FAS 123(R)-2. This means that we no longer have to worry that, in the future, options that are exercisable for an extended period of time after termination of employment will be subject to liability treatment. I know you probably had forgotten that this was even a possibility, but it’s something I’ve been thinking about as I see FASB alerts that seem to indicate that the FASB is making progress on the other projects that would have impacted this. Now we all have one less thing to worry about. I also think this might be a sign that the FASB may eventually allow awards to non-employees to receive the same treatment as awards to employees—how awesome would that be!
The FASB has issued the exposure draft of the proposed amendments to ASC 718. The FASB alert showed up in my email at approximately 1 PM Pacific yesterday and it’s 105 pages long. Suffice it to say, I haven’t exactly read the whole thing yet. Here are some initial thoughts based on a quick skim of the draft.
Don’t remember what the proposed amendments are about? Refresh your memory with my blog entry “Proposed Amendments to ASC 718 – Part I.” Also, don’t miss the 23rd Annual NASPP Conference, where we will be waxing nostalgic about the first ten years under ASC 718 (FASB Chair Russ Golden is even going to say a few words) and will have special session focused on the steps companies need to take to prepare for the amendments.
I Thought This Was About Simplification
105 pages! Come on. The whole entire standard including all the illustrations and basis for conclusions was only 286 pages. This “simplification” is over one-third the length of the original standard.
There’s More to It Than You Might Think
I’ve been focusing on just three areas that will be amended, but the exposure draft addresses nine issues. Two of the issues relate to the classification of stuff on the cash flow statement (snore). Three relate to private companies—I’ll get to these in a subsequent blog entry. And one makes FSP FAS 123(R)-1 permanent, which is a relief. You will recall that this relates to the treatment of options that provide for an extended time to exercise after termination of employment. Perhaps I wasn’t paying attention, but I wasn’t aware that the FASB was considering this.
Share Withholding
The proposed amendments relating to share withholding clarify that the company must have a withholding obligation to avoid triggering liability treatment. So share withholding for outside directors and ISOs will still trigger liability treatment. But, as expected, where the company is obligated to withhold taxes, the proposal allows share withholding for taxes up to the maximum individual tax rate. The proposal doesn’t address mobile employees (i.e., can you use the maximum rate out of all of the applicable jurisdictions?) or whether rounding up is permissible if you are withholding at the maximum rate.
Tax Accounting
Also, as expected, the proposal provides that all tax effects will run through the income statement. What may come as a surprise is that this eliminates the tax benefit under the Treasury Stock Method calculation used for diluted EPS. Because net earnings (the numerator of EPS) is reduced for the full tax benefit to the company, there won’t be any adjustment to the denominator for this benefit anymore.
Expected Forfeitures
For service conditions only, the proposal would allow companies to account for forfeitures as they occur, rather than applying an estimated forfeiture rate to expense accruals. For performance conditions, however, companies will still be required to estimate the likelihood of the condition being achieved.
Comments
Comments on the exposure draft can be submitted using the FASB’s Electronic Feedback Form and must be submitted by August 14, 2015.
How many grant dates can one option have? The answer, as it turns out, is more than you might think. I was recently contacted by a reporter who was looking at the proxy disclosures for a public company and was convinced that the company was doing something dodgy with respect to a performance option granted to the CEO. The option was not reported in the SCT for the year in which it was granted, even though the company discussed the award in some detail in the CD&A, had reported the grant on a Form 4, and the option price was equal to the FMV on the date the board approved the grant. The reporter was convinced this was some clever new backdating scheme, or some way of getting around some sort of limit on the number of shares that could be granted (either the per-person limit in the plan for 162(m) purposes or the aggregate shares allocated to the plan).
Bifurcated Grant Dates
When I read through the proxy disclosures, I could see why the reporter was confused. The problem was that the option had several future performance periods and the compensation committee wasn’t planning to set the performance goals until the start of each period. The first performance period didn’t start until the following year.
Under ASC 718 the key terms of an award have to be mutually understood by both parties (company and award recipient) for the grant date to occur. I’m not sure why the standard requires this. I reviewed the “Basis for Conclusions” in FAS 123(R) and the FASB essentially said “because that’s the way we’ve always done it.” I’m paraphrasing—they didn’t actually say that, but that was the gist of it. Read it for yourself: paragraph B49 (in the original standard, the “Basis for Conclusions” wasn’t ported over to the Codification system).
The performance goals are most certainly a key metric. So even though the option was granted for purposes of Section 409A and any other tax purposes (the general standard to establish a grant date under the tax code is merely that the corporate action necessary to effect the grant, i.e., board approval, be completed), the option did not yet have a grant date for accounting purposes.
And the SCT looks to ASC 718 for purposes of determining the value of the option that should be reported therein. Without a grant date yet for ASC 718 purposes, the option also isn’t considered granted for purposes of the SCT. Thus, the company was right to discuss the grant in the CD&A but not report it in the SCT. (The company did explain why the grant wasn’t reported in the SCT and the explanation made perfect sense to me, but I spend an excessive amount of time thinking about accounting for stock compensation. To a layperson, who presumably has other things to do with his/her time, I could see how it was confusing and suspicious).
Trifurcated Grant Dates?
The option vested based on goals other than stock price targets, so it is interesting that the company chose to report the option on a Form 4 at the time the grant was approved by the compensation committee. Where a performance award (option or RSU) is subject to performance conditions other than a stock price target, the grant date for Section 16 purposes doesn’t occur until the performance goals are met. So the company could have waited until the options vested to file the Form 4.
If you are keeping score, that’s three different grant dates for one option:
Purpose
Grant Date
1. Tax
Approval date
2. Accounting / SCT
Date goals are determined
3. Form 4
Date goals are met
If the FASB is looking for other areas to simplify ASC 718, the determination of grant date is just about at the top of my list. While they are at it, it might nice if the SEC would take another look at the Form 4 reporting requirements, because I’m pretty sure just about everyone (other than Peter Romeo and Alan Dye, of course) is confused about them (I had to look them up).
I blogged back in October that the FASB has announced amendments to ASC 718 (Proposed Amendments to ASC 718 – Part I and Part II). Some of you may be wondering what happened with that project. The answer is that the FASB is still working on it. They have been meeting to discuss transitional issues and other projects related to the simplification of ASC 718.
The FASB met last Wednesday, February 4, to decide a number of transitional matters. I listened to the meeting; here are my observations. First, even though February 4 was my birthday, the FASB did not appear to be celebrating this in any way. In fact, it appeared that they did not even know it was my birthday. Go figure.
Share Withholding
The FASB debated whether the transition to the new share withholding guidance should be on a modified retrospective basis (essentially, companies switch over to the new method for all outstanding awards with an adjustment in the current period to account for the change) or a prospective basis only (the guidance would only apply to new awards) and decided on the modified retrospective approach. The discussion on this matter seems largely theoretical to me. The transitional guidance would only be a concern for companies that are currently subject to liability treatment due to their share withholding practices. In my experience however, there are very few, if any, companies that fall into that bucket. Most companies have carefully structured their share withholding procedures to avoid liability treatment so they don’t need to worry about any transition.
Estimated Forfeitures
The transition for changing from estimating forfeitures to accounting for forfeitures as they occur garnered even more discussion, with one FASB staffer recommending that companies be given a choice between the modified retrospective and prospective approaches. I guess there was a concern that companies wouldn’t be able to figure out the appropriate adjustment necessary to switch over to the new guidance using the modified retrospective method. But Board members were worried about confusion resulting from two different transition methods, so they decided to require the modified retrospective method.
I think that this whole area is so confusing as to be completely inscrutable to investors. Your auditors barely understand it. So while I appreciate the concern about confusion, personally I can’t see that a modicum more confusion is going to make any difference here.
But, having said that, I also can’t believe that companies would want to switch over to accounting for forfeitures as they occur on a prospective basis. That would leave companies applying an estimated forfeiture rate to awards granted prior to specified date but not after that date (or maybe to employees hired before a specified date—it was a little unclear from the Board’s discussion). That seems crazy complicated to me. My guess is that if companies can’t figure out the adjustment necessary to switch over to accounting for forfeitures as they occur, they’ll just continue to apply an estimated forfeiture rate.
Tax Accounting
For as controversial at it is, there was very little discussion among Board members of the transition to accounting for all excess benefits/shortfalls in the P&L. I guess the accounting is controversial but the transition is relatively simple. The Board decided on prospective approach. As I understand it, once the amendments are in effect, companies will just switch over to recognizing benefits/shortfalls in the P&L—the journal entries they were making to paid-in-capital to account for tax effects will now be made to tax expense.
A recent IASB proposal to amend IFRS 2 offers hope that life under IFRS, if it ever happens for US companies, may not be quite so bad after all.
Background: Share Withholding and the IASB
One area where IFRS 2 differs from ASC 718 is that the US standard incorporates a practical exception that allows share withholding to be used to cover taxes due upon settlement of awards without triggering liability treatment, whereas IFRS 2 has never provided this exception. Thus, awards that allow for share withholding are technically subject to liability treatment under IFRS 2 (although, I’ve heard that compliance with this requirement among US companies is spotty). This seems like such a small thing but it’s actually quite significant and vexing. According to the NASPP’s data(1), share withholding is, by far, the dominant approach to collecting taxes on awards, with around 80% of respondents reporting that this method is used for over 75% of all tax events.
This requirement makes share withholding fairly unattractive under IFRS 2. If US accounting standards are ever brought into convergence with IFRS, this could have been a death knell for share withholding. The amount of variability it would introduce to the P&L could be untenable for many companies.
IASB Backs Off
I’m excited to report, however, that the IASB has issued an exposure draft of an amendment to except share withholding from liability treatment under IFRS 2, similar to the exception that currently exists in ASC 718.
For companies that use share withholding for awards issued to employees in foreign subsidiaries for which they must prepare financial statements in accordance with IFRS, this is one less item to reconcile between the IFRS and US GAAP financials. And, should the SEC ever adopt IFRS here in the US, there will be many things to worry about, but this won’t be one of them. To paraphrase Iggy Azalea (with Ariana Grande in a song that is played way too often my gym): “I got 99 problems but share withholding won’t be one!” (You had no idea they were even singing about IFRS, did you?)
Some People Are Never Happy
But wait, you say—didn’t FASB just announce an amendment to ASC 718 related to share withholding? The IASB’s amendment will align with the current ASC 718, which provides an exception for share withholding for the statutorily required tax withholding. By the time the IASB finalizes their amendment, the FASB may have amended ASC 718 to allow share withholding up to the maximum individual tax rate (even if this exceeds the statutorily required withholding). If so, IFRS 2 and ASC 718 still wouldn’t align on this point. But at least it’s a step in the right direction and maybe someone will point this little nit out to the IASB before they finalize their amendment.
More Information
For more info on the IASB’s proposed amendment and a link to their exposure draft, see the NASPP alert “IASB Proposes Amendments to IFRS 2.” Thanks to Bill Dunn at PwC for alerting me to the IASB proposal.
Last week, I blogged about the proposed amendments to ASC 718. This week, I have some more information about them.
Is This a Done Deal?
Pretty much. The FASB has already considered—and rejected—a number of different alternatives on most of these issues. My understanding is that there was consensus among Board members as to each of the amendments and most of the changes aren’t really controversial, so we don’t expect there to be much debate about them.
Tax accounting is an exception, of course. This change is very controversial; in fact, the FASB considered this approach back when they originally drafted FAS 123(R) and ultimately rejected it is because of the volatility it introduces to the income statement. So perhaps there will be some opposition to this change.
What’s the Next Step?
The FASB will issue an exposure draft with the text of the changes, then will solicit comments, make changes as necessary, and issue the final amendments. I have hopes that we’ll see an exposure draft by the end of the year, with possibly the final amendments issued in the first half of next year.
ASC 718(R)?
No, the new standard will not be called “ASC 718(R),” nor will the amendments be a separate document. That’s the advantage of Codification. The amendments will be incorporated into existing ASC 718, just as if they had been there all along. In a few years, you may forget that we ever did things differently.
What’s the Next Project?
This isn’t the FASB’s last word on ASC 718. They have a number of additional research projects that could result in further amendments to the standard:
Non-Employees: In my opinion, the most exciting research project relates to the treatment of non-employees. As I’m sure you know, it is a big pain to grant awards to consultants, et. al., because the awards are subject to liability treatment until vested. The FASB is considering whether consultants should be included within the scope of ASC 718, with awards to them accounted for in the same manner as employee awards. If not for all consultants, than at least for those that perform services similar to that of employees.
Private Companies: Another research project covers a number of issues that impact private companies, such as 1) practical expedients related to intrinsic value, expected term, and formula value plans and 2) the impact of certain features, such as repurchase features, on the classification of awards as a liability or equity.
Unresolved Performance Conditions: Another project relates to awards with unresolved performance conditions. I’ll admit that I’m not entirely sure what this is.
That’s All, For Now
That’s all I have on this topic for now. You can expect more updates when we hear more news on this from the FASB.
A big thank-you to Ken Stoler and Nicole Berman of PwC for helping me sort through the FASB’s announcement. If you haven’t already, be sure to check out their Equity Expert Podcast on the amendments.
The Financial Accounting Foundation has completed their post-implementation review of FAS 123(R) (see my August 27, 2013 blog entry, “FAF to Review FAS 123(R)“) and the upshot is that they think the standard (now known as ASC 718) needs to be simplified. In response the FASB has proposed some very significant amendments to the standard. In addition to the summary I provide here, be sure to listen to our newest Equity Expert podcast, in which Jenn Namazi discusses the proposed amendments with Ken Stoler and Nicole Berman of PwC.
Share Withholding
Currently, ASC 718 provides that withholding for taxes in excess of the statutorily required rate triggers liability treatment. This has been a problem because of rounding considerations (if companies round the shares withheld up to the nearest whole share, does that constitute withholding in excess of the required rate) and, more significantly in jurisdictions (e.g., US states and other countries) that don’t have a flat withholding rate. The FASB proposal would change the standard to allow share withholding up to the maximum tax rate in the applicable jurisdiction, regardless of the individual’s actual tax rate.
This is obviously great news and would make share withholding a lot more feasible for non-US employees. There is still the question of rounding, however. It also isn’t clear how this would apply in the case of mobile employees. Finally, don’t forget that, here in the US, the IRS still opposes excess withholding at the federal level (see my January 9, 2013 blog entry “Supplemental Withholding“).
Estimated Forfeitures
Estimating forfeitures is one of the most complicated aspects of ASC 718—I’ve seen multiple presentations of over an hour in length on just this topic. The FASB has proposed to dispense with this altogether and allow companies to simply recognize the effect of forfeitures as they occur. Companies would be required to make a policy decision as to how they want to recognize forfeitures that would apply to all awards they grant. I assume that this would apply only to forfeitures due to service-related vesting conditions, but I don’t know this for certain.
Tax Accounting
Another area of the standard that has provided a wealth of material for NASPP webcasts and Conference sessions is how companies account for the tax deductions resulting from stock awards. FASB’s proposal would change the standard to require that all tax savings and all shortfalls flow through the income statement. If an award results in a deduction in excess of the expense recognized for it, the excess savings would reduce tax expense (currently, the excess is recorded to APIC). Likewise, shortfalls would always increase tax expense (currently, shortfalls are deducted from the company’s APIC balance to the extent possible, before reducing tax expense).
With this change, companies would no longer need to track what portion of APIC is attributable to excess tax deductions from stock plan transactions. But this would introduce significant variability into the income statement (which is the reason FASB decided against this approach ten years ago). This approach gets us closer to convergence with IFRS 2, but is still not completely aligned with that standard (in IFRS 2, all excess deductions run through APIC and all shortfalls run through the P&L). But this makes me wonder if companies will simply record the windfall/shortfall tax deductions as they occur, or would they have to estimate the potential outcome and adjust tax expense each period until the deduction is finalized (as under IFRS 2)?
Now? Now They Figure This Out?!
All of these changes will eventually make life under ASC 718 a heck of a lot simpler than it is now. That’s the good news. The bad news is that it’s really too bad the FASB couldn’t have figured this out ten years ago. Not to say “I told you so” but I’m sure there were comment letters on the exposure draft that warned the FASB that the requirements in at least two of these areas were too complicated (I’m sure of this because I drafted one of them).
If you are already thinking wistfully about how much more productively you could have used all that time you spent learning about estimated forfeitures and tax accounting, imagine how your administrative providers must feel. They’ve spent the last ten years (and a lot of resources) developing functionality to help you comply with these requirements; now they’ll have to develop new functionality to comply with the new simpler requirements.
More Info
I’ll have more thoughts on this and some of the FASB’s other decisions—yes, there’s more!—next week. For now, check out the PwC and Mercer alerts that we posted to the NASPP website (under “More Information” in our alert, “FASB Proposes Amendments to ASC 718“). And listen to our Equity Expert podcast on the proposed amendments with Ken Stoler and Nicole Berman of PwC.
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.
The FASB recently ratified an EITF decision and approved issuance of an Accounting Standards Update on “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (their words, not mine).
What the Heck?
I was completely baffled as to when an award would have a performance condition that could be met after the end of the service period. After all, isn’t the period over which the performance goals can be met the very definition of a service period? So I spoke with Ken Stoler of PwC, who translated this into English for me.
Turns out, it’s a situation where the award is no longer subject to forfeiture due to termination of employment but is still subject to some sort of performance condition. Here are two situations where we see this occur with some regularity:
Retirement-Eligible Employees: It is not uncommon for companies to provide that, to the extent the goals are met, performance awards will be paid out to retirees at the end of the performance period. Where this is the case, a retirement-eligible employee generally doesn’t have a substantial risk of forfeiture due to termination but could still forfeit the award if the performance goals aren’t met.
IPOs: Privately held companies sometimes grant options or awards that are exercisable/pay out only in the event of an IPO or CIC. The awards are still subject to a time-based vesting schedule and, once those vesting requirements have been fulfilled, are no longer subject to forfeiture upon termination. But employees could still forfeit the grants if the company never goes public nor is acquired by a publicly held company.
The EITF’s Decision
The accounting treatment that the EITF decided on is probably what you would have guessed. You estimate the likelihood that the goal will be met and recognize expense commensurate with that estimate. For retirement-eligible employees, the expense is based on the total award (whereas, for other employees, the expense is also commensurate with the portion of the service period that has elapsed and is haircut by the company’s estimate of forfeitures due to termination of employment).
For example, say that a company has issued a performance award with a grant date fair value of $10,000, three-fourths of the service period has elapsed, and the award is expected to pay out at 80% of target. In the case of a retirement-eligible employee, the total expense recognized to date should be $8,000 (80% of $10,000). In the case of an employee that isn’t yet eligible to retire, the to-date expense would be, at most, $6,000 ($80% of $10,000, then multiplied by 75% because only three-fourths of the service period has elapsed). Moreover, the expense for the non-retirement-eligible employee would be somewhat less than $6,000 because the company would further reduce it for the likelihood of forfeiture due to termination of employment.
The same concept applies in the case of the awards that are exercisable only in the event of an IPO/CIC, except that, in this situation, the IPO/CIC is considered to have a 0% chance of occurring until pretty much just before the event occurs. So the company doesn’t recognize any expense for the awards until just before the IPO/CIC and then recognizes all the expense all at once.
Doesn’t the EITF Have Anything Better to Do?
I had no idea that anyone thought any other approach was acceptable and was surprised that the EITF felt the need to address this. But Ken tells me that there were some practitioners (not PwC) suggesting that these situations could be accounted for in a manner akin to market conditions (e.g., haircut the grant date fair value for the likelihood of the performance condition being met and then no further adjustments).
I have no idea how you estimate the likelihood of an IPO/CIC occurring (it seems to me that if you could do that, you’d be getting paid big bucks by some venture capitalist rather than toiling away at stock plan accounting). And in the case of performance awards held by retirement-eligible employees, my understanding is that the reason ASC 718 differentiates between market conditions and other types of performance conditions is that it’s not really possible for today’s pricing models to assess the likelihood that targets that aren’t related to stock price will be achieved. Which I guess is why the EITF ended up where they did on the accounting treatment for these awards. You might not like the FASB/EITF but at least they are consistent.
The Financial Accounting Foundation, or FAF, has announced that they are going to conduct a post-implementation review of FAS 123(R). In today’s blog, I take a look at what this might mean for the future of stock plan accounting.
What the Heck?
The FAF oversees and provides funding for the FASB, as well as several other entities involved in promulgating US accounting standards. The FAF has recently begun conducting post-implementation reviews to evaluate the effectiveness of standards issued by the FASB (and also standards issued by GASB, Governmental Accounting Standards Board, which is the only other accounting standards board here in the United States–they aren’t just targeting the FASB).
You Can Take Your Aluminum Hat Off–They’re Probably Not Out to Get Us
Upon reading that the FAF is planning a post-implementation review of FAS 123(R), my first reaction was alarm. In the past, when various accounting authorities have reviewed US accounting standards on stock compensation, the outcomes haven’t been particularly favorable for those of us on team stock awards (notable examples include FIN 44, EITF 96-18, and, of course, FAS 123(R)). The FAF says (on its website) that standards are selected for a PIR based on “considerable amount of stakeholder input indicating that the standard might not be meeting its stated objectives.”
So I asked Bill Dunn at PwC about it and he put me in touch with his colleagues Ken Stoler and Pat Durbin (Pat is PwC’s national practice leader on standard setting). Ken and Pat don’t think the PIR signals any significant changes for stock plan accounting. They think that FAS 123(R) was selected for review merely because it is complex, pervasive, and has raised numerous practice issues–not because the FAF thinks there is anything wrong with the standard. They suspect that any changes that the FAF recommends will be minor and only in areas where divergence in practice has developed.
What Is a PIR?
According to the FAF website, the PIR has three main goals: to determine if the standard meets its stated objectives, to evaluate the standard’s implementation and compliance costs and benefits, and to provide feedback to improve the standard setting process. The PIR team uses a variety of procedures, including reviewing the project archives, reviewing academic and other research, and collecting stakeholder input via surveys and interviews. They then present their findings to the FASB’s chair and oversight committee.
As I understand it, the PIR team doesn’t recommend any specific standard-setting actions, they simply point out areas of concern and it is up to the FASB to decide whether or not to take action. Which means that this is a loonnnng process. First the FAF has to conclude the PIR, which takes a long time, and then the FASB has to act on their concerns, which takes even longer. But, the silver lining for me is that it sounds like there could be fodder for several blog entries along the way, especially if the FAF finds any areas of concern (which surely they will–it’s a big standard).
Why “FAS 123(R)”?
My other thought upon reading this was to wonder why the FAF calls the standard “FAS 123(R)” when the rest of us have to call it “ASC 718.” Because, frankly, it’s been a struggle to get used to the ASC 718 moniker. If the FAF can call it FAS 123(R), I thought maybe the rest of us could too. But, unfortunately, Ken doesn’t think we’ll all go back to calling it FAS 123(R) anytime soon.