GAAP and IFRS

FASB Refines Stock Option Project

The board is one step closer to issuing a final standard after addressing several transition issues. On deck: settling on the effective date.
Craig SchneiderOctober 8, 2004

In its latest effort to finalize Statement 123R, its proposed standard on stock-based compensation, this past week the Financial Accounting Standards Board tackled transition issues for public companies, including a complex tax-accounting matter that continued to divide the board members.

While much of Wednesday’s hour-long discussion saw the FASB board unanimous in their agreement with staff recommendations on several technical transition issues, such as not indicating a preference for how to account for awards with graded vesting, the transition for deferred tax balances of equity awards saw a split vote and a considerable amount of debate. The task was to determine when companies should begin measuring the amount of excess tax benefits that can be accumulated in additional paid-in capital (APIC) to offset future write-offs of deferred tax assets to the income statement.

In the end, FASB voted to allow companies to begin accumulating excess tax benefits in APIC retroactive to awards granted after the effective date of Statement 123 — December 15, 1994 — even if compensation cost was not recognized in the financial statements.

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“It’s a fair place to start,” said FASB board member G. Michael Crooch of the board’s majority decision. This tax-accounting issue, however, has been “a really controversial issue for us throughout the life of the project,” said fellow board member Leslie Seidman.

The issue arose after FASB decided in an August meeting to return to the treatment already established under Statement 123. According to that rule, when the actual tax-deduction benefit is less than expected, it must be recognized in the income statement unless there are excess tax benefits sufficient to absorb the shortfall, in which case it’s written off against equity.

Since most companies have recorded the stock-option expense only in the footnotes of the income statement, explained Crooch, there wasn’t separate tax accounting to determine any extra tax benefits in the equity statement. FASB therefore needed to decide how far back companies could go and to pool those excesses once they comply with the proposed standard, Statement 123R, which calls for the expensing of options.

Seidman was one of two board members who favored an alternative approach that would have allowed companies to begin pooling the excess tax benefits earlier, providing the same pool regardless of transition methods. She claimed it would be “the best way to achieve symmetrical accounting that reflects the economics and gets everyone on even footing going forward.” The other approaches, she added, were “practical cutoffs.”

Next Wednesday, FASB plans to continue its deliberations on Statement 123R. On the agenda are issues related to fair-value measurement, any follow-up issues from prior board meetings, and — perhaps most notably — the effective date of the standard.

Many corporate managers and auditors have asked FASB to delay its effective date by as much as a year to allow more time to evaluate and implement valuation methods. Members of Congress have also asked the Securities and Exchange Commission to step in and delay the effective date. Regardless, Crooch is encouraged by the board’s progress, which has put it on target to issue a final standard by the end of the year. “I think we’re getting close,” he said.

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