The IASB recently finalized amendments to IFRS 2 relating to the accounting treatment of share withholding and cash-settled awards.
FASB in the Lead
The IASB issued the exposure draft of the amendments in November 2014—so long ago that I was beginning to think that maybe they had forgotten about the project and would never get around to it. By way of reference, the FASB issued the exposure draft of their amendments to ASC 718 seven months later and still managed to issue their final amendments three months ahead of the IASB.
Share Withholding
The most exciting amendment permits shares to be used to cover tax withholding without triggering liability treatment. Under the original IFRS 2, share withholding triggered liability treatment for the shares that were applied to the tax payment—no exceptions. This resulted in a bifurcated accounting treatment for the award: the portion that would be settled in cash to cover the tax payment was subject to liability treatment while the rest of the award was subject to equity treatment. It was also an area where IFRS 2 diverged from ASC 718, which has always included an exception to liability treatment for share withholding.
Unfortunately, the two standards still don’t converge. The IASB’s amendment only permits share withholding up to the statutorily required payment, and, as my readers know, the FASB recently expanded the exception in ASC 718 to apply to share withholding up to the maximum individual tax rate in the applicable jurisdiction. It’s ironic: the primary reason the FASB expanded the exception in ASC 718 was to facilitate share withholding for non-US employees but, unfortunately, for companies that have to report under IFRS, the international standard will still pose an obstacle to doing this.
Cash-Settled Awards
The IASB also amended IFRS 2 to clarify the vesting conditions that apply to cash-settled awards should be accounted for in the same manner as for stock-settled awards. The upshot is that for non-market conditions, the company records expense based on an estimated forfeiture rate and trues up to outcome. Market conditions (and non-vesting conditions) are incorporated into the fair value of the award. I’m surprised that anyone thought anything different. I guess that’s the problem with a “principles-based standard.” If you don’t spell everything out with a nice clear set of rules, someone is bound to interpret the principle in a way you don’t want them to.
The amendments also clarify how to account for modifications that change the classification of awards from cash-settled to stock-settled. I’m not going to bother to explain this because 1) it’s a total snore (as compared to the rest of the action-packed amendments) and 2) it happens so rarely that hardly anyone cares about it. And, as with any modification of stock awards, it’s crazy complicated—if this is something your company is doing, you should really be talking to your accounting advisors and not relying on an English major to tell you how to account for the modification.
Thanks to Ken Stoler of PwC for bringing the amendments to my attention and for providing a handy summary of them.
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.
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.
It’s a holiday week so I thought I’d do something a little lighter for today’s blog entry. Over the nearly 20 years that I’ve worked in this industry, I have asked a lot of questions about stock compensation. I’ve also found the answers to a lot of them, but there are still a few questions that remain a mystery to me. For today’s entry, I present some of my unanswered questions.
IFRS 2?
The international financial reporting standard for stock compensation is IFRS 2. Two? Is this really the second standard that the IASB drafted? Seriously? Of all the possible areas of discrepancy in worldwide accounting, stock-based compensation was the second most important area they could think of? And, if so, what the heck was so important that it beat us out for the number 1 spot?
Why Two and a Half Months?
What is magical about two and a half months after the end of the calendar year for the IRS? Would anyone care if the deadline were just two months (i.e., the end of the second month)? Because in terms of explaining both the provisions of 409A and the FICA short-term deferral rule, this would be a heck of a lot easier to say.
Forms 1 & 2?
Whatever happened to Forms 1 and 2? I must remember to ask Alan Dye about this. Wouldn’t it have made more sense to call Forms 3, 4, and 5 something like “Forms 16A, 16B, and 16C”? Or maybe 16H (“H” for holdings), 16NE (“NE” for non-exempt transactions), and 16E (“E” for exempt transactions)? The form for Rule 144 is called “Form 144,” why not use the same naming system for Section 16 forms?
When Is 30 Days After June 30?
Why does Form G-4 (filed by companies that have issued loans for the purchase of their own stock in excess of the Federal Reserve Board thresholds) have to be filed within 30 days following June 30? Wouldn’t that always be by July 30? Why couldn’t the Federal Reserve Board just say, “file this form by July 30”? Does the Federal Reserve Board have a different calendar than I do?
How Does the IRS Determine What Constitutes “News”?
Why does the IRS send out an email announcing inflation adjustments for the carbon dioxide (CO2) sequestration credit under §45Q but doesn’t send an email announcing proposed rule changes under Section 83?
How Many EDGAR Passwords Does It Take to Change a Lightbulb?
Why the heck does it take four–count ’em, that’s 4–codes to change my EDGAR password? That’s two more codes than I have to enter to change the password on any of my financial accounts. And it’s useless as a form of security because I can’t remember any of them, so I have them all written down in the same document–if someone manages to get one of them, he/she probably has them all. Heck, I bet most companies have a single document where they store all of these codes for all of their insiders–all in one handy place for anyone who wants to sabotage their insiders’ Section 16 filings. This is a perfect example of why lawyers shouldn’t be allowed to develop computer systems.
What Is a Borker, Anyway?
Does anyone else consistently mistype the word “broker” as “borker”? It seems so inappropriate but also kind of appropriate at the same time. “Consluting” for “consulting” is another typo I make with some regularity. Thankfully, both errors are caught easily with spellcheck.
Just a few thoughts to ponder and perhaps discuss with your family as you enjoy Thanksgiving dinner. Enjoy your holiday!
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.
Many things in life take on a “hurry up and wait” path, and the SEC’s evaluation of whether or not to incorporate International Financial Reporting Standards (“IFRS”) into U.S. accounting practices is no different. As I write this blog, we are approaching four years since the SEC first issued their proposed road map to IFRS (August 27, 2008) and the acronym IFRS became a buzz word in the stock compensation world.
What’s the Latest News?
On July 13th, the SEC issued a long-awaited staff report that basically summarized their considerations around whether or not the U.S. should adopt IFRS. The key word here is “considerations”. The bottom line of the SEC’s report can be articulated quite simply: the SEC’s report did not contain a recommendation on whether IFRS should be adopted, or a decision and time frame for potential adoption, but rather an analysis of all of the related pros and cons. Where does that leave us? We remain in uncertain territory as to if, when and how IFRS will be adopted (thus the title of this blog). We are still very much in “if” territory, though many accounting experts keeping watch on this issue seem to feel strongly that it’s still a matter of “how” and “when” and not “if”.
No News is….No News!
The IASB has vocalized their impatience surrounding the U.S.’s slow decision making process when it comes to adopting IFRS, so that pressure is undoubtedly mounting. Even so, the prospect of the U.S. adopting IFRS remains on the horizon, and is not something the SEC is likely to decide on before the end of 2012. The good news is that we can turn our attention to more pressing matters (such as what to do about all the tax rate changes that are scheduled to kick in January 1, 2013), and, at least from a stock compensation perspective, not have to worry about looming accounting changes having an impact on us anytime soon.
This is still on the radar, and we’ll keep any updates coming. If you do have spare time, our IFRS2 Portal contains information on many of the considerations on the topic.