This week I provide additional coverage of the decisions the FASB made on the ASC 718 simplification project (see my blog from last week for Part 1).
Cash Flow Statement
The Board affirmed both of the proposals related to the cash flow statement: cash flows related to excess tax benefits will be reported as an operating activity and cash outflow as a result of share withholding will be reported as a financing activity. Nothing particularly exciting about either of these decisions but, hey, now you know.
Repurchase Features
The board decided not to go forward with the proposal on repurchases that are contingent on an event within the employee’s control. The proposal would have allowed equity treatment until the event becomes probable of occurring (which would align with the treatment of repurchases where the event is outside the employee’s control). The Board decided to reconsider this as part of a future project. The Board noted that this would have required the company to assess whether or not employees are likely to take whatever action would trigger the repurchase obligation, which might not be so simple to figure out (we all know how hard it is to predict/explain employee behavior).
Practical Expedient for Private Companies
The Board affirmed the decision to provide a simplified approach to determining expected term for private companies, but modified it to allow the approach to be used for performance awards with an explicitly stated performance period. I’m not sure that many private companies are granting performance-based stock options, but the few who are will be relieved about this, I’m sure.
Options Exercisable for an Extended Period After Termination
Companies that provide an extended period to exercise stock options after retirement, disability, death, etc., will be relieved to know that the FASB affirmed its decision to eliminate the requirement that these options should be subject to other applicable GAAP. This requirement was indefinitely deferred, but now we don’t have to worry about it at all.
Last Monday, the FASB met to review the comments submitted on the exposure draft of the proposed amendments to ASC 718. I have been watching the video of the meeting (and you can too) and have made it about half way through. After getting over my shock that no one on the Board has mentioned what a finely crafted comment letter I submitted, here’s what I’ve learned so far. (See the NASPP alert “FASB Issues Exposure Draft of ASC 718 Amendments” for a summary of the exposure draft).
Tax Accounting
The most controversial aspect of the exposure draft is the proposal to record all excess tax benefits and shortfalls in tax expense. Despite the fact that the overwhelming majority of letters submitted opposed this (see my Nov. 10 blog “Update to ASC 718: The Comments“)—including my own aforementioned finely crafted letter—and the FASB staff’s recommendation that the excess benefits and shortfalls be recognized in paid-in-capital instead, the Board voted to affirm the position in the exposure draft. I was a little surprised at how little time the Board spent considering the staff’s recommendation.
The Board decided that stock plan transactions could be treated as “discrete items” that do not need to be considered when determining the company’s annual effective tax rate. I don’t know a lot about effective tax rates, but I’m guessing that this is poor consolation for the impact this change will have on the P&L.
Estimated Forfeitures
The Board affirmed the proposal to allow companies to make an entity-wide decision to account for forfeitures as they occur, rather than estimating them. At one point, the board was considering requiring companies to account for forfeitures as they occur (without even re-exposing this decision for comment), which was a little scary. I think most of us have supported this proposal primarily on the basis that companies can keep their current processes in place if they want; I’m not sure it would have received as much support if accounting for forfeitures as they occur had been mandatory (this wasn’t even mandatory under FAS 123). Thankfully, the Board backed off from that suggestion.
Share Withholding
The Board affirmed the decision to expand the share withholding exception to liability treatment, in spite of concerns that the potential cash outflow without a recorded liability could be misleading for users. For one nail-biting moment, eliminating the exception altogether was on the table (in my amateur opinion, this would seem to go well beyond the scope of what is supposed to be a “simplification” project, given the considerable impact this would have on practices with respect to full value awards). Luckily, this suggestion did not receive any votes (not even from the Board member who suggested it, oddly enough).
Stay Tuned
More on the rest of the FASB’s decisions in a future blog entry.
As followers of this blog know, the FASB recently issued an exposure draft proposing amendments to ASC 718 (see “It’s Here! The FASB’s Amendments to ASC 718,” June 9, 2015). In today’s blog, I take a look at common themes in the comment letters on the exposure draft.
A Lot Less Controversial
The FASB received just under 70 comment letters on the exposure draft, making this proposal far less controversial than FAS 123 or FAS 123(R) (by contrast, the FASB heard from close to 14,000 commenters on FAS 123(R)). In general, the letters are supportive of the proposed amendments.
Opposition to Proposed Tax Accounting
The area of most controversy under the exposure draft is the proposal to require all tax effects (both excess deductions and shortfalls) to be recognized in the income statement. Virtually all of the letters submitted mention this issue and this was the only issue that a number of letters address. A little over 70% of the letters oppose the FASB proposal. About half of the letters suggest that all excess deductions and shortfalls should be recognized in paid-in capital, instead of in earnings.
Many commenters mention the volatility the proposed approach would create in the P&L and express concern that this would be confusing to the users of financial statements. This is the argument we made in the NASPP’s comment letter (see “The NASPP’s Comment Letter,” August 18).
Here are a few other arguments in opposition of the FASB’s proposal that I find compelling (and wish I had thought of):
Several commenters refer to the FASB’s own analysis (in the Basis for Conclusions in FAS 123(R)) that stock awards comprise two transactions: (i) a compensatory transaction at grant and (ii) an equity transaction that occurs when the award is settled. They point out that it is inconsistent to recognize the tax effects of the second transaction in income when the transaction itself is recognized in equity.
Several commenters point out that the increase or decrease in value between the grant date and settlement is not recognized in income, therefore it would be inconsistent to recognize the tax effects of this change in value in income.
One commenter points out that this would merely shift the administrative burden from tracking the APIC pool to forecasting the impact of stock price movements on the company’s earnings estimates, negating any hoped for simplification in the application of the standard.
Share Withholding
The comment letters overwhelming support the proposal to expand the exception to liability accounting for share withholding. Several letters point out what appears to be an inconsistency in the language used to amend the standard with the FASB’s described intentions. While the FASB indicated in its discussion of the exposure draft that it intended to permit share withholding up to the maximum individual tax rate in the applicable jurisdiction, the proposed languages refers to the individual’s maximum tax rate. Also, the exposure draft appears to have inadvertently excluded payroll taxes from the tax rate. Hopefully these are minor issues that will be addressed in the final update.
One commenter suggests that, for mobile employees, companies should also be allowed to consider hypothetical tax rates that might apply to individuals under the company’s tax equalization policy for purposes of determining the maximum withholding rate.
Forfeitures
While the letters also were very supportive of the proposal to allow companies to choose to recognize forfeitures as they occur, I was surprised to find that a couple of letters suggested that companies should be required to recognize forfeitures as they occur.
What’s Next?
The comment period ended on August 14, so the FASB has had close to two months to consider the comments. I heard a rumor at the NASPP Conference that the Board will discuss them at one of its November meetings but I haven’t seen anything on this in the FASB Action Alerts yet. I expect that we won’t see the final amendments until next year. Given the controversy of the tax accounting proposal, possibly late next year.
This is the most controversial aspect of the exposure draft. The volatility that this change introduces to the P&L is likely to be significant for companies that rely heavily on stock compensation. We performed a very quick analysis of a handful of companies and found that, for several of them, recognizing excess tax benefits in their P&L would have increased EPS by 10%. In one case, EPS increased by 60%. Ultimately, we think this will be incredibly confusing to investors and other financial statement users. We also feel that it is highly unintuitive for changes in a company’s stock price to generate significant profits and losses for the company. While eliminating the ASC 718 APIC pool is very attractive, ultimately, we felt that the impact on earnings and effective tax rates would offset the benefits of simplifying this area of the standard. Because of this, we recommended against this amendment.
We suggested that companies record all excess tax benefits and shortfalls to paid-in capital, rather than tax expense. This would eliminate the need to track the APIC pool without impacting the P&L.
Forfeitures
We supported the proposal to allow companies to make a policy election to account for forfeitures as they occur. Our only comment on this topic was to suggest that the FASB provide a mechanism for companies to change their election without treating it as a change in accounting principle (which requires a preferability assessment and retrospective restatement).
Share Withholding
We supported the proposal to amend the standard to provide that shares can be withheld to cover taxes up to the maximum individual tax rate without triggering liability treatment.
We asked the FASB to provide additional guidance on how this requirement applies to mobile employees and suggested that share withholding be allowed up to the combined maximum tax rate in all jurisdictions that the transaction is subject to.
We also asked the FASB to remove the requirement that the tax withholding be mandated by law.
Practical Expedient to Expected Term
We supported allowing private companies to treat the midpoint of the vesting period and contractual term of an option as the option’s expected term for valuation purposes. We asked the FASB to remove the condition that the option be exercisable for only a short period of time after termination of employment and also requested removal of the conditions applicable to performance-based options.
The Rest of It and Thanks
We supported the remaining proposals in the exposure draft without comment.
Thanks to everyone that completed the NASPP’s quick survey on the exposure draft—I hope to have the results posted by the end of this week.
Thanks also to individuals who agreed to serve on our task force for this project: Terry Adamson of Aon Hewitt, Dee Crosby of the CEP Institute, Elizabeth Dodge of SOS, Sean Kelly of Morgan Stanley, Ken Stoler of PwC, Sean Waters of Fidelity, Thomas Welk of Cooley, and Jason Zellmer of Bank of America Merrill Lynch. Their help was invaluable.
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.
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.
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.
I’m going to start this discussion from the end and start with the company’s tax deduction. Certain employee stock compensation transactions that result in taxable income (e.g., non-qualified stock option exercises and restricted stock vests) are eligible for a corresponding company tax deduction. For example, if an employee realizes $1,000 income on an NQSO exercise and the company’s applicable tax rate is 40%, the company is eligible for a tax deduction of $400.
However, under FAS123(R), a company can’t just wait for the transaction to take place and then book the entire tax deduction. Instead, it must try and anticipate what that tax benefit will be and book it over the same schedule as the expense accrual for the award. Because the company can’t know for sure what income will result from eligible transactions, FAS123(R) details how to go about anticipating that unknown with as a deferred tax asset (DTA).
Calculating DTA
DTA, unlike the actual tax deduction, is calculated based on the FAS123(R) valuation of the grant using the company’s current tax rate and is generally booked over the vesting schedule. For example, if the company is expensing $5,000 for an NQSO each year over a four-year vesting schedule and the company’s tax rate is 40%, the company books a DTA of $2,000 each year of the same schedule (adjusted for expected forfeitures until the actual vest date).
Back to the End
When a transaction does take place the company can calculate the actual tax deduction, which will most likely be either more or less than the DTA amount. The company reverses the DTA that was previously booked and takes the actual tax deduction. However, the difference between these two numbers must also be reconciled. If the DTA is less than the actual tax deduction (i.e., the company realized more than the anticipated tax benefit), the company adds the excess tax benefit to the paid in capital account–often referred to as the APIC pool. However, if the actual tax deduction turns out to be less than the booked DTA (i.e., the company anticipated more tax benefit than it realized), then the company reduces the existing APIC pool by the unrealized tax benefit amount–or takes a tax expense if the APIC pool isn’t sufficient.
Get More
This is, of course, just the beginning of tax accounting for equity compensation under FAS123(R)–or even just a full conversation on deferred tax assets. We have a wealth of information on the NASPP’s Stock Plan Expensing portal. We also have an in-depth webcast in the NASPP webcast archive, “Practical Guide to Tax Accounting Under FAS 123(R).” However, if you are looking for the total information package on financial reporting, including accounting for tax effects, I highly recommend the NASPP’s course, Financial Reporting for Equity Compensation. The first class is today at 12:00 PM PT, but if you miss it, don’t worry. Not only are there four more fact-filled sessions, you can catch up on the recording of today’s class and take advantage of all the bonus materials. Register now!
This week I write about how stock compensation can introduce volatility into the P&L and why this is a problem.
The Problem with Liability Treatment
The recent article “Higher Stock Price Triggers First-Quarter Loss for Barnwell” (Honolulu Star Advertiser, May 12, 2011, Andrew Gomes) highlighted for me the exact problem with stock compensation that is subject to liability treatment. The article explains that Honolulu-based Barnwell Industries experienced a $1.5 million loss this quarter–a reversal of a $1.5 million profit for the same quarter last year. The reason for the loss is that their stock price doubled during the quarter.
How can a stock price increase cause the company to recognize a loss? The answer is that Barnwell has granted options that can be paid out in cash (the options include a cash SAR component) and are therefore subject to liability treatment. Thus, the increase in their stock price had a very significant impact on their stock compensation expense. Although they haven’t granted options since 2009, Barnwell’s stock option expense went from $46,000 for the comparable quarter last year to $1,677,000 for the current quarter. That’s an increase of 3,546%–kind of hard to explain to shareholders, who, for the most part, probably don’t have the foggiest understanding of liability vs. equity treatment.
Performance Awards Too
While performance awards receive equity treatment under ASC 718, they can also introduce the potential for similar volatility to the P&L. When performance awards are contingent on non-market based goals (e.g., revenue, earnings, and other internal metrics), the likelihood of forfeiture is estimated and expense is recorded based on this estimate. If the company does well, the likelihood of forfeiture will be lower and the expense for the awards will increase.
It’s important to keep this in mind when designing performance award programs and to set appropriate caps on payouts as a means of controlling stock plan expense (not to mention, how do you handle a situation where awards vest based on earnings, the earnings target is hit, and this decreases the forfeiture estimate to the point where the additional expense for the awards reduces earnings below the target). This is also a reason to consider market-based awards–i.e., awards that vest based on stock price targets or total shareholder return. For these awards, the likelihood of meeting the targets is baked into the initial fair value estimate and there are no further adjustments if the likelihood that the targets will be achieved changes.
Need to know more about the accounting treatment and design considerations for performance awards? Don’t miss the NASPP’s pre-conference program, “Practical Guide to Performance-Based Awards” at this year’s NASPP Conference.
IFRS 2
If ever required for US companies (see last week’s blog entry, “IFRS 2: The Saga Drags On“), there are three requirements under IFRS 2 that could introduce significant volatility to the P&L:
Tax Accounting: IFRS 2 requires all tax shortfalls to run through the P&L and, moreover, requires companies to estimate their tax benefit/shortfall each accounting period and adjust tax expense accordingly. This is the opposite of Barnwell’s problem. Here, an increase in stock price wouldn’t be a problem, but a decrease that causes options and awards to be underwater (i.e., the current intrinsic value of the award is less than the expense) could result in significant increases in tax expense, which would reduce earnings for the period. Sort of rubbing salt into the wound–reduced earnings is not going to help get the stock price back up.
Share Withholding: Share withholding on either options or awards triggers liability treatment (for the portion of the award that will be withheld to cover taxes) under IFRS 2. As the company’s stock price increases, this liablity–and associated P&L expense–will increase.
Payroll Taxes: The company’s matching tax liability for payroll taxes (Social Security and Medicare in the US) is also treated as a liability that must be estimated and expensed each accounting period. Again, as the company’s stock price increases, this liability and expense will also increase.
See the NASPP’s IFRS 2 Portal for articles on these IFRS 2 requirements.
Last Chance to Qualify for Survey Results This is the last week to participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte). Issuers must complete the survey by this Friday, May 20, to qualify to receive the full survey results. Register to complete the survey today.
New “Early-Bird” Rate for the NASPP Conference If you missed last Friday’s early-bird deadline for the 19th Annual NASPP Conference, you can still save $200 on the Conference if you register by June 24.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 new early-bird rate is only available until June 24.
Participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte, with survey systems support provided by the CEP Institute). Don’t wait–this week is your last chance to participate.