FASB Ends Payout Fears; SEC And EU Eye Reconciliation

With no significant changes to its recently proposed guidance, the Financial Accounting Standards Board has finalized its relaxation of the original language in its share-based payment standard on how to account for stock options granted with an embedded cash settlement feature.

FASB acted swiftly to finalize the guidance and calm another recent wave of panic in the implementation of stock option expensing, although the board’s position isn’t likely to provide the comfort that companies were hoping to find.

A healthy portion of stock option plans include a provision that the option will be paid in cash if certain trigger events occur, usually a change in control, according to Matthew Dyckman, a partner at law firm Thacher Proffitt. The original language of FASB’s controversial stock option expensing rule, Statement No. 123R, says such options should be recorded on the balance sheet as a liability.

That requirement slipped by largely unnoticed until late 2005, Dyckman says, when accountants questioning regulators about the language of the standard and began alerting clients. FASB issued its staff position in late January to relax that requirement, saying companies would be required to book such a liability only if the cash settlement became probable.

Dyckman

“While the staff position is an improvement over the initial position taken in FASB Statement No. 123 because it doesn’t require that any liability be booked until the cash payment contingency becomes probable, the requirement to book equity awards as liabilities is not good news for companies,” Dyckman said.

Thomas Welk, a partner at law firm Cooley Godward, says a good deal of panic swept among the firm’s clients after PricewaterhouseCoopers warned its clients that they consider amending their plans to steer clear of the liability classification. He says he expected FASB would issue some kind of guidance relaxing the classification of such options as a liability, because the original language seemed an inadvertent oversight.

PCAOB Remediation Standard Approved; Guidance Expected

Expect more guidance this spring from the Public Company Accounting Oversight Board on how auditors can implement the PCAOB’s newest standard, Auditing Standard No. 4, which establishes a means for auditors to issue opinions on whether a previously reported material weakness in internal controls continues to exist.

The Securities and Exchange Commission issued an order last week approving the standard and directing the PCAOB to issue “a clear and concise outline of the affirmative audit steps set forth in the standard” within 90 days.

The PCAOB adopted the standard and sent it in July 2005 to the SEC for review and approval. AS4 gives auditors discretion to issue audit opinions when management wants to report mid-year that it has corrected a material weakness disclosed during the annual reporting process.

The standard is not a requirement for auditors to issue such opinions, but an allowance to do so and a procedure to follow if auditors are asked by a client to act on management’s claim of remediation. The SEC’s order reiterates that the standard does not allow companies to rewrite history by amending the year-end disclosure of a material weakness.

U.S. And EU Regulators Hope To Eliminate Reconciliation

In separate addresses to the U.S. Chamber of Commerce last week, SEC Chairman Christopher Cox and European Union Internal Markets Commissioner Charlie McCreevy reiterated their commitment to end reconciliation reporting requirements—and at the same time pinned some responsibility on one another to make it happen.

Cox noted the European Union’s undetermined stance on whether it will require U.S. companies reporting in Generally Accepted Accounting Principles to provide additional disclosures in Europe. According to an SEC statement, Cox said he expects GAAP ultimately to be deemed equivalent to International Financial Reporting Standards, now in their second year of mandatory use in the EU. Cox also noted that he would not insist on a specific degree of convergence in financial reporting standards before the SEC might eliminate its reconciliation requirements.

McCreevy

McCreevy, meanwhile, said full convergence of standards cannot be a prerequisite for eliminating reconciliation. “We should make sure that our standards are understandable to investors on both sides of the Atlantic,” he said. “We also need to establish a new level of cooperation on the implementation of our standards and make sure that no conflicting decisions are taken.”

The speeches and related coverage can be found in the box at right.