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.
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.
With so many proposed, pending, or newly finalized pieces of legislation right now, I feel a little overwhelmed trying to keep up. Fortunately, we have a couple great resources on our site to help me keep it all straight. First, there is the “Cheat Sheet” provided by OnSecurities.com (posted to the Say on Pay portal). There is also this article by Choate, which has a great chart that details the legislation and which parts of corporate governance it impacts.
Here are a couple of the latest developments, along with a little newsworthy item that caught my eye.
FASB Exposure Draft
As I’m sure you are all aware, the U.S. is moving toward the adoption of IFRS. Nobody is sure when we will adopt IFRS as the U.S. accounting standard, but we do occasionally see signs that progress is being made in that direction. The Exposure Draft issued by FASB on December 17th is a perfect example.
The Exposure Draft is a proposed clarification regarding companies that issue equity awards that are denominated in a foreign currency. If enacted, the amendment in this exposure draft won’t impact very many companies at all. This is because Topic 718 (formerly FAS123R) already addresses the more common situations of companies denominating their equity awards in a foreign currency: using the functional or the payroll currency of the foreign entity. The scenario missing from the current wording in Topic 718 is where a company denominates their equity awards in a currency that is neither the functional nor the payroll currency, but is instead the currency of the market in which a substantial amount of the company’s shares trade. This draft clarifies that such an award would also be considered an equity award, providing that it would otherwise qualify for equity treatment. (For more information, check out our alert.)
What FASB is attempting to do with the clarification offered in this proposed change to Topic 718 is create uniformity with respect to the expensing of certain equity awards. More importantly to me, however, is the fact that FASB specifically addresses how the proposed amendments compare with IFRS. The trouble is that neither Topic 718 nor IFRS currently specifically call out the situations in which this amendment would be applicable, but it is likely that if IFRS were to be updated to include this situation, it would be the same. This is because, as stated in the Exposure Draft, most companies currently reporting under IFRS already expense these awards as equity awards.
Facilitating Shareholder Director Nominations
The SEC recently reopened the comment period for the proposed rule, Facilitating Shareholder Director Nominations. The proposed rule is designed to empower certain shareholders (based on ownership thresholds and minimum holding periods) to influence (presumably to improve) corporate governance by means of introducing both director nominations and proposals to amend director nomination process or disclosure requirements.
Existing comments can be viewed here. One of the concerns being voiced are that the bar for determining which shareholders may submit nominations and proposals is set too low, which could potentially allow short-term investors (like hedge funds) to encourage inappropriate risk-taking. Another concern is the amount of time and energy boards may potentially need to divert from day-to-day business decisions in order to deal with the politicization of board elections.
Although it is unlikely that this rule, if adopted, would impact the daily responsibilities of most stock plan managers, it does highlight SEC efforts to create better corporate governance by giving shareholders more power to influence corporate business strategy. Maybe what it does mean for you stock plan managers out there is that it’s time to renew (or initiate) your relationship with your company’s investor relations group.
FAR Out!
I came across this interesting article in the Hedge Fund Law Report on the merits of granting hedge fund managers appreciation rights that would be similar to a stock appreciation right (although the article compares them to stock options), but track against the increase in the fund’s value.
Two things really struck me about this article. First, it’s encouraging and powerful to keep seeing the conviction that creating an ownership mentality improves the long-term success of a company by aligning employee interests with shareholder interests. Much like the Treasury Special Master’s determinations highlighted the preference of performance-based equity compensation over cash compensation, the idea of granting an appreciation right that pays out with the success of a hedge fund really highlights the importance of appropriate equity compensation as a motivating vehicle.
The second thing that really caught my eye is that the name “Fund Appreciation Right” (FAR) has actually been trademarked by a particular compensation administration company (Optcapital). So, it’s not that other administrators (or funds) can’t issue an equity vehicle that is in the form of an appreciation right; they just can’t call it a FAR. It makes me wonder what our conversations would sound like if someone had trademarked “stock option” or “restricted stock unit”, forcing each company to come up with their own nomenclature!
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