New Rules at the APIC Pool

Reluctantly, FASB offers companies another method for calculating tax benefits related to stock-option grants.
Craig SchneiderSeptember 26, 2005

To help companies implement Statement 123R, the Financial Accounting Standards Board’s revised rule on expensing stock options, last week the board proposed an optional method for calculating the tax impact of stock-option grants. Some board members also expressed the thought that this issue should have been raised by companies long before now.

Under the current standard, when a company’s 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. After FASB completed its lengthy deliberations that culminated in 123R, however, the board learned that in practice, companies are sometimes unable to properly compute their net excess tax benefits.

Several companies apparently complained to the board either that they may not have the relevant information for calculating these benefits — commonly known as the additional-paid-in capital (APIC) pool — or that significant costs or complexities would be required to determine the full historical APIC pool back to the effective date of the original Statement 123, in 1995.

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To be sure, the appropriate data may be particularly hard to come by for companies that have undergone a change in record-keepers, a spin-off, or a business combination. These companies may be unable to ascertain the original grant-date valuations for the options, or they may be unable to match those valuations with the exercises of the awards by employees.

FASB’s new proposal, on the other hand, would draw on information that should be “readily available,” according to FASB practice fellow Reggie Oakley. It includes a computational component that establishes the beginning balance of the APIC pool of awards, as well as a simplified method to determine the subsequent impact of awards that are fully vested and outstanding when a company adopts 123R. The proposed solution relies on information that exists on the face of the company’s consolidated financial statements, adds Oakley — which should be considerably easier than rebuilding the appropriate detail from a decade’s worth of books and records.

The proposal also includes guidance for determining the appropriate classification of excess tax benefits in the statement of cash flows.

But should such a proposal even have been necessary? Last year, when finalizing 123R, FASB decided that it would leave the language from the original Statement 123 unchanged. That decision seemed to allow for a simple, portfolio-type accounting approach — but little did FASB board members realize that the original statement was not being properly implemented.

The issue “came as a surprise to us,” says FASB board member Katherine Shipper. She adds that during the 123R comment period, the public roundtables, and the board’s final deliberations, companies made no mention that they were implementing the original standard in ways that caused them to not have the information “that we assumed they had.”

While Shipper believes that FASB’s alternative proposal “will solve the problem,” her distaste for having to address the issue after so much dialogue with companies was clear. “I will vote for this in my absolute most sullen, acquiescent way,” she said during last week’s meeting.

Board member Michael Crooch also expressed frustration that the matter did not surface sooner. “I’m more than sullen,” he said. “In Oklahoma, you’d say I’d been ‘snake-bit.’—” Crooch first suggested that companies that didn’t have the information should start their APIC pool value at zero, but he, too, eventually threw his support behind the alternative approach.

Other implementation issues relating to the APIC pool concept will likely need to be addressed at future FASB meetings. Last Wednesday’s discussion focused on retrospective issues, whereas topics such as spin-offs would fall under prospective accounting.

The proposal will be open to a 15-day public comment period.

This Wednesday, the board will consider ratifying measures agreed to at the September 15 meeting of the Emerging Issues Task Force, regarding:

• “Accounting for Purchases and Sales of Inventory with the Same Counterparty”

• “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination”

• “Accounting for Modifications to Conversion Options Embedded in Debt Securities and Related Issues”

• “Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature”