Comp. Rules Won't Seek Caps; Option Guidance; More

As the Securities and Exchange Commission considers new rules on executive compensation, it will focus on disclosure, not salary caps, said Chairman Christopher Cox.

Cox

“This is not about wage controls,” he said in an address last week to the Economic Club in New York. “It’s about wage clarity—information that’s clear, complete and comprehensible.”

Cox said the existing rules on executive compensation are overly complex. “When it comes to disclosure documents intended for investors, nothing is more complicated than the description of executive compensation,” he said. “We aim to simplify it and make it more meaningful. … We don’t want to judge, comment, editorialize, pontificate, meddle, or otherwise interfere in salary decisions. And we most certainly don’t want to cap salaries.”

The SEC hasn’t changed its rules on executive compensation in 13 years, Cox said, while executive compensation in the marketplace has changed significantly. “The rules simply haven’t kept up,” he said. “The result is that too often, technical compliance with disclosure rules doesn’t adequately capture the details of the latest compensation packages.”

Compliance Week has extensively covered the potential for new compensation disclosure rules; some of the most recent coverage—as well as Chairman Pitt's speech—can be found in the box above, right.

SEC Reiterates Guidance When Retirement Affects Option Terms

In a speech to a conference of the American Institute of Certified Public Accountants, SEC Accounting Fellow Shan Benedict offered some staff advice on how companies can assure compliance with newly effective stock option expensing rules. Benedict said some companies are uncertain about how to accounting for vested options when employees can continue to vest even into retirement.

The expensing rules, described in FASB Statement No. 123(R), Share-Based Payments, says companies are required to expense an option over the employee’s required service period before an option is full vested. For example, if an employee must serve four years before an option is fully vested, the option should be expensed over the four-year period.

When an employee can retire during that period and continue vesting, however, the option should be expensed when granted, Benedict said. “Once the employee is eligible to leave employment without losing the award, by definition, there is no longer a requisite service period,” he said.

Benedict said the SEC has learned that many companies have not followed this approach before Statement 123 was revised. “We have not asked registrants to consider this to be an error requiring restatement,” he said. Instead, the staff is advising companies to adopt the correct approach as they begin expensing options and treat it as a change in accounting policy to be disclosed, along with its impact, to investors.

Benedict also addressed questions the staff has heard about how to treat options that can be canceled if an employee violates a non-compete agreement. Companies often wait to expense such options until the non-compete would expire, but Benedict said companies should apply a facts-and-circumstances analysis and delay expensing only if there is a meaningful risk of such options being voided.

The staff would not regard a non-compete

provision as automatic justification for delaying expensing, Benedict said, nor would it expect such justification to be common. “If you believe your specific fact pattern results in such a conclusion, we would encourage you to come talk to us,” he said.

The determination would be based on such factors as the terms of the option and the non-compete, the company’s prior experiences with non-completes, and perhaps even individual circumstances of the employee in question.

Wirtshafter

John Wirtshafter, an employee benefits attorney with McDonald Hopkins, said Benedict’s remarks make it clear the test won’t be easy to pass, but many companies hold valuable non-competes and should still seek to delay the expense if circumstances warrant.

If, for example, the situation involves an employee with highly marketable skills and several years to work before retirement age, the company may well be justified in delaying the expense, Wirtshafter said, which also creates other tax and financial benefits.

Finally, Benedict also reminded companies to heed SEC’s rules on non-GAAP disclosures if planning to provide investors with income figures net of stock option costs. “We would expect a company to be able to demonstrate that it utilizes the non-GAAP financial measure to internally evaluate performance,” he said. “Stating that others evaluate the performance of the company using this measure would not meet this standard.”

Wirtshafter said Benedict's remarks are helpful at a time when companies are still working through a lot of fine details adopting the new expensing rules.

Corp. Fin. Issues Summary of Accounting, Disclosure Issues

The Securities and Exchange Commission’s Division of Corporation Finance has published a 68-page summary of the hot button accounting and disclosure issues that are currently on its radar, along with reminders of its position on the issues.

The document is published periodically on an as-needed basis to serve as an update and reminder of the issues the staff hold most near and dear when reviewing filings, according to an SEC spokesman. “The purpose of the outline is to update the interested public on Commission actions and activity and to indicate staff observations and suggestions regarding filer practice and compliance,” the spokesman said.

The document covers, among other things, final rules on securities offering reform, stock options, IFRS filers, asset-backed securities, and tagged data, as well as recent guidance on accelerated filers, internal control reporting, management discussion and analysis, proxy materials, GAAP enforcements, dividend policy disclosures, cash flow statements, lease accounting and disclosure, revenue, business combinations, investments, contingency and loss reserves, pensions and other post-retirement benefits, derivatives and hedging, loan losses, materiality, and auditors.

It is available for download in the box at right.