FASB issues share-based payment standard

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20 Dec 2004

The US FASB has published FASB Statement 123 (revised 2004) Share-Based Payment.

Statement 123(R) requires that the compensation cost relating to share-based payment transactions be recognised in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. The Statement is the result of a two-year effort to respond to requests from investors and many others that the FASB improve the accounting for share-based payment arrangements with employees – the previous standard had permitted note disclosure in lieu of expense recognition. Click for (PDF 17k). Deloitte (USA) has published a special issue of its Heads Up newsletter summarising the key concepts of FASB Statement No. 123(R). Click to download the (PDF 292k). While Statement 123(R) is largely consistent with IFRS 2 Share-based Payment, some differences remain, as described in a Q&A document FASB issued along with the new Statement:

Q22. Is the Statement convergent with International Financial Reporting Standards? The Statement is largely convergent with International Financial Reporting Standard (IFRS) 2, Share-based Payment. The Statement and IFRS 2 have the potential to differ in only a few areas. The more significant areas are briefly described below.

  • IFRS 2 requires the use of the modified grant-date method for share-based payment arrangements with non-employees. In contrast, Issue 96-18 requires that grants of share options and other equity instruments to non-employees be measured at the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or (2) the date at which the counterparty's performance is complete.
  • IFRS 2 contains more stringent criteria for determining whether an employee share purchase plan is compensatory or not. As a result, some employee share purchase plans for which IFRS 2 requires recognition of compensation cost will not be considered to give rise to compensation cost under the Statement.
  • IFRS 2 applies the same measurement requirements to employee share options regardless of whether the issuer is a public or a nonpublic entity. The Statement requires that a nonpublic entity account for its options and similar equity instruments based on their fair value unless it is not practicable to estimate the expected volatility of the entity's share price. In that situation, the entity is required to measure its equity share options and similar instruments at a value using the historical volatility of an appropriate industry sector index.
  • In tax jurisdictions such as the United States, where the time value of share options generally is not deductible for tax purposes, IFRS 2 requires that no deferred tax asset be recognized for the compensation cost related to the time value component of the fair value of an award. A deferred tax asset is recognized only if and when the share options have intrinsic value that could be deductible for tax purposes. Therefore, an entity that grants an at-the-money share option to an employee in exchange for services will not recognize tax effects until that award is in-the-money. In contrast, the Statement requires recognition of a deferred tax asset based on the grant-date fair value of the award. The effects of subsequent decreases in the share price (or lack of an increase) are not reflected in accounting for the deferred tax asset until the related compensation cost is recognized for tax purposes. The effects of subsequent increases that generate excess tax benefits are recognized when they affect taxes payable.
  • The Statement requires a portfolio approach in determining excess tax benefits of equity awards in paid-in capital available to offset write-offs of deferred tax assets, whereas IFRS 2 requires an individual instrument approach. Thus, some write-offs of deferred tax assets that will be recognized in paid-in capital under the Statement will be recognized in determining net income under IFRS 2.
Differences between the Statement and IFRS 2 may be further reduced in the future when the IASB and FASB consider whether to undertake additional work to further converge their respective accounting standards on share-based payment.

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