October 13, 2004 Board Meeting, FASB
Equity-based
compensation. The Board continued its redeliberations of the March
2004 FASB Exposure Draft, Share-Based Payment. The Board discussed
certain issues related to fair value measurement, equity and liability
classification, cost-benefit procedures, and the effective date for public
companies. The Board made the following decisions regarding those issues.
Certain Fair Value Measurement Issues
The Board unanimously affirmed its previous decisions regarding
volatility and the concept of expected term in estimating the grant-date
fair value of instruments granted in a share-based payment transaction.
However, the Board decided to add guidance similar to that of IFRS 2,
Share-based Payment (paragraphs B38B41), relating to the
consideration of certain capital structure effects when estimating the
grant-date fair value of share-based awards. The Board noted, however,
that it would be rare for a public company to adjust the grant-date fair
value of an instrument for those effects because those effects generally
are reflected in the underlying stock price.
Effect of Dividends or Dividend Equivalents on Recognition and
Measurement of Equity Awards
The Board decided to incorporate into the final Statement a measurement
principle stating that the estimate of an awards grant-date fair value
should take account of dividend (or dividend-equivalent) rights or the
absence thereof. The Board also agreed to provide some examples
illustrating the application of that principle.
The Meaning of Requisite Service Period and Certain Noncompete
Agreements
The Board decided that if the terms of a noncompete agreement,
represent, in substance, a service condition, the compensation cost of the
related equity-based award would be recognized over the substantive
service period. The Board also decided to provide an illustration in the
final Statements implementation guidance of such a case.
Awards with Graded Vesting
The Board decided that the choice of attribution method for awards with
graded vesting schedules would be a policy decision that is not dependent
on an enterprises choice of valuation technique. The Board also clarified
that the choice of attribution method pertains solely to awards with
service conditions.
Equity and Liability Classification
The Board decided to:
- Clarify the guidance in paragraph 39A of the Exposure Draft
concerning the classification of awards with repurchase features.
- Clarify the guidance in the final Statement concerning the
classification of puttable shares by incorporating certain aspects of
guidance based on APB Opinion No. 25, Accounting for Stock Issued to
Employees.
- Require all options on shares with repurchase features to be
classified consistently with the underlying shares, and provide an
illustration in the final Statement.
The above decisions would result in the following:
- Mandatorily redeemable shares and options on mandatorily redeemable
shares would be classified as liabilities unless the shares or
underlying shares were subject to the deferral provisions of FSP FAS
150-3, Effective Date, Disclosures, and Transition for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and
Certain Mandatorily Redeemable Noncontrolling Interests under FASB
Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.E
- Puttable shares would be classified as equity (or temporary equity)
if certain APB Opinion 25-based criteria relating to the redemption
feature and redemption price are met.
- Options on puttable shares would be classified as equity (or
temporary equity) if the underlying shares would be classified in the
same manner.
- Puttable options would be classified as liabilities.
Cost-Benefit Procedures
The Board considered this issue solely as it pertains to public
entities and concluded that based on the findings of the cost-benefit
procedures performed related to this project, the final Statement will
sufficiently improve the financial reporting to justify the costs it will
impose.
Effective Date for Public Companies
The Board discussed the effective date for public companies and decided
that:
- The final Statement would be effective for any interim or
annual period beginning after June 15, 2005, meaning that an
entity would apply the final Statement to all employee awards of
share-based payment granted, modified, or settled in any interim or
annual period beginning after June 15, 2005. Additionally, as of the
beginning of the period in which the final Statement is first applied,
compensation cost would be recognized for the portion of awards
outstanding for which the requisite service has not been rendered as of
that date; measurement and attribution of compensation cost for those
awards would be based on the same estimate of the grant-date fair value
and the same attribution method used previously for either (a)
recognition or (b) pro forma disclosures under the original provisions
of Statement 123. Any cumulative-effect adjustment required under the
final Statement (for example, for a change in the method of estimating
forfeitures) would be recognized as of the beginning of the period in
which the final Statement is first applied.
- If an entity adopts the final Statement using the modified
prospective application method in other than the first interim period of
its fiscal year, it may use the modified retrospective application (MRA)
method for those earlier interim periods. However, any cumulative-effect
adjustment required under the final Statement (for example, for a change
in the method of estimating forfeitures) would be recognized as of the
beginning of the interim period in which the final Statement is first
applied. Under the MRA method, an entity would recognize compensation
cost for periods prior to the effective date in accordance with the
original provisions of Statement 123; that is, an entity would recognize
employee compensation cost in the amounts reported in the pro forma
disclosures provided in accordance with Statement 123.
- Early adoption would be encouraged provided that financial
statements for periods prior to the effective date have not been issued.