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.
With the impending Facebook IPO crowding out just about any other news in my Google alert these days, I’ve got private companies on my mind. I don’t have anything to add on the Facebook IPO, but there has been an interesting development recently relating to accounting standards for private companies.
Debate Rages Over Private Company Accounting There is apparently a heated debate in the accounting community (specifically between the Financial Accounting Foundation, which oversees the FASB, and the American Institute of Certified Public Accountants) over whether the FASB should have oversight of accounting standards for private companies. So much so that the AICPA put together the Blue-Ribbon Panel on Standard Setting for Private Companies (is that the BRPSSPC? what exactly is a blue-ribbon panel, anyway? I thought it was something related to 4H or maybe beer…) to evaluate the matter and make recommendations. In response to the panel’s recommendations, the FAF has proposed creating the Private Company Standards Improvement Council, which would review current US GAAP to determine whether exceptions or modifications should be made for private companies.
Any suggestions made by the PCSIC (is that pronounced “pic-sic”?) would be subject to approval by the FASB. The problem with this, however, is that the Blue-Ribbon Panel recommended creating a completely separate, independent entity that wouldn’t be beholden to the FASB. The AICPA seems to be vehemently opposed to any approach where the FASB still has authority over the standards for private companies, and has threatened to take their toys and go home to create their own standards setting authority if the FAF proceeds with its proposal. (See “AICPA Turns Up Volume on Call for Independent Board,” Matthew Lamoreaux, Journal of Accountancy, October 18, 2011.)
I have no idea what this might mean for how private companies account for stock compensation, but I can definitely think of a few things I’d like to change about ASC 718 if I were a private company. (Ok, heck, I can think of some things I’d like to change even if I were a public company. In fact, let’s just scrap the whole standard.) It does surprise me that when the rest of the world seems to be focused on convergence, we are actually considering bifurcating our accounting standards here in the U.S. Kind of seems like the wrong direction…
Why Can’t Public Companies Do This?
Now, I imagine some of you that work for public companies are thinking: “Hey! Wait a minute here. If private companies can ignore the FASB and create their own standards setting organization, why can’t we?” Private companies can do this because, for the most part, their financial statements aren’t filed with the SEC, which requires the statements to be prepared in accordance with GAAP as determined by the FASB. Since private companies don’t file their financial statements with the SEC, they don’t have to follow the SEC’s rules (at least with respect to financial statements–there are other securities laws they still have to comply with, more on this in a future blog). And, other than the authority vested in FASB by the SEC, there’s no law that says that FASB is the supreme ruler of GAAP. So private companies can do whatever they want with their financial statements, so long as any investors and lenders that might want to review their financials are willing to accept them. Public companies, however, are still stuck with the FASB, unless you can somehow convince the SEC to let you do what you want, too. Good luck with that.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
I’m sure many of my readers have been disappointed that I haven’t been writing much about accounting lately, so today I take a look at the status of IFRS here in the United States.
IFRS: No News is Good News? The fact is that there hasn’t really been much to report on IFRS lately. As my readers know, back in 2008, the SEC proposed a roadmap that would have required adoption of IFRS in the United States, phased in from 2014 to 2016. Then the economy collapsed and rushing headlong into IFRS seemed like maybe not such a good idea. More recently, there have apparently been some developments–that I do not understand in the least, so don’t ask me about them–relating to the accounting treatment of highly devalued debt securities that have also given regulators pause on the idea of wholesale adoption of IFRS here in the United States.
In February of last year, the SEC announced that it backed off on the roadmap a bit and would make a decision in 2011 as to whether or not IFRS should be adopted in the United States. I expect that it will be several more months before the SEC announces its decision.
Condorsement?
More recently, the idea of “condorsement” has been proposed. Under this approach, rather than requiring adoption of IFRS, U.S. GAAP would continue to exist, but FASB would work towards converging our standards to IFRS on a standard-by-standard basis. I admit that I am a little fuzzy on how condorsement differs from convergence. I would offer ten points to anyone that can explain it, but, to be honest, I don’t think I really want to know.
Convergence
Speaking of convergence, the FASB and IASB have an ongoing program designed to achieve this goal for projects specified under a memorandum of understanding (issued in 2006 and updated in 2008). Last month, they announced that five of the projects had been completed and the remaining three will be completed in the second half of 2011 (a slight delay from the original schedule). None of the projects relate to stock compensation, however. Phew.
SEC Roundtable
At the same time that the FASB and IASB announced the progress on their convergence project, the SEC announced that it will sponsor a Roundtable on July 7, 2011 to discuss incorporating IFRS into the U.S. financial reporting system.
A news bulletin issued by Morrison and Foerster discusses the FASB/IASB and SEC announcements.
Share Withholding: No News is Bad News
A key difference between IFRS 2 and ASC 718 is that, under IFRS 2, liability treatment is required any time shares are withheld by the company to cover tax withholding. I think many of us harbor a secret hope that this will somehow change before IFRS is required in the United States (either that, or that IFRS is never required and this somehow is left out of convergence/condorsement). So far, however, no such luck. A PricewaterhouseCoopers alert issued in September of last year reports that the Interpretations committee of the IASB refused to carve out an exception. The committee felt it did not have the authority to do so; the matter can still be presented to the IASB for relief.
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Only Ten Days Left for NASPP Conference Early-Bird Rate It’s hard to believe how time flies, but the 19th Annual NASPP Conference early-bird rate expires this Friday, May 13. This deadline will not be extended–register for the Conference today, so you don’t miss out.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the early-bird rate is only available until May 13.
The SEC released a Statement last Wednesday addressing many of the concerns raised during the comments period for the proposed Roadmap for transitioning U.S. issuers to a high-quality global accounting standard, presumably IFRS. Although the SEC confirmed its commitment to an impending convergence and adoption of a single set of global accounting standards, the SEC really appears to have taken a serious look at the potential impediments to adopting IFRS as a single global accounting standard.
More Time
In the 2008 proposed Roadmap, the SEC set 2011 as the date when a determination will be made on the viability of adopting IFRS for U.S. issuers; and last week’s Statement keeps 2011 as the target date for that determination. What has changed is that the original Roadmap would have required, should the 2011 determination be made if favor of transition, the adoption of IFRS starting in 2014. This date is pushed out to 2015 as the earliest adoption date (pending the determination).
Preparing for a Determination
The milestones set by the proposed Roadmap are still in place as a baseline requirement for the SEC to make its 2011 determination. In addition, the SEC Statement stresses that convergence between FASB and IFRS will be an essential step in preparing for a determination. What this new Statement expands on is additional preparation by way of a Work Plan designed to position the SEC to make a solid determination. This Work Plan clearly reflects the SECs commitment to addressing concerns raised in the comments on the Roadmap. The Work Plan delves into analyzing the viability of IFRS as a high-quality global accounting standard and also evaluating the potential benefits and costs associated with U.S. adoption. Specifically, through the Work Plan, SEC staff will strive to:
Determine if IFRS is sufficiently developed and consistently applied;
Ensure that global accounting standards are independently set and are for the benefit of investors;
Provide investor understanding and education on IFRS;
Examine how a change in accounting standards will impact U.S. regulatory environment;
Determine full impact on issuers (both large and small);
Establish the readiness of U.S. financial statement preparers and auditors to make the conversion to IFRS.
Reactions
Although concerns over the viability of IFRS adoption in the U.S. are still prevalent, there is a general consensus that an international accounting standard is desirable, even inevitable. The Work Plan outlined in the SEC’s Statement was well-received, even if there are still major roadblocks to be overcome. There’s a lot to be done before next year’s determination is made to get not only the SEC, but also U.S. issuers and investors ready!
In a prepared speech, SEC Commissioner Luis A. Aguilar expressed some concerns around IFRS, including potential discretion afforded to financial statement preparers under IFRS, the ability to audit and enforce IFRS-based accounting standards, and whether or not adopting IFRS is ultimately in the best interest of investors.
The AICPA issued a statement supporting the move to a global accounting standard, but also urging the SEC to provide a certain date for IFRS adoption.
In a press release, CAQ Director Cindy Fornelli expressed her support and commitment to work with the SEC on carrying out the Work Plan.
FEI issued a statement applauding the SEC for developing the Work Plan.
More Information on IFRS
Although the SEC isn’t ready to say for certain if IFRS will ultimately be the “high-quality global accounting standard” that both the Roadmap and the Statement call for, it is certain that continued convergence between U.S. GAAP and IFRS will be ongoing. In addition, U.S. companies with overseas subsidiaries may need to adopt IFRS before any general transition, at least for the subsidiary. If you want to learn more about IFRS, check out our recorded webcast, “The Race to IFRS-Don’t be Left Behind”, the “IFRS–A Lesson in Implementation” session materials from our 2009 Conference (under Accounting, Auditing and Controls), and Deloitte’s guide to IFRS posted to our Document Library.