The Financial Accounting Standards Board has issued its much-anticipated guidance indicating companies may follow long-standing practice in setting the grant date for employee stock option awards. And while the guidance is giving companies cause for relief, it's making accountants feel as if they’re walking on a tightrope.
The guidance, issued as a proposed staff position, is titled “Practical Exception to the Application of Grant Date as Defined in FASB Statement No. 123(R)” (available from box at right). It says companies can do as they’ve done for years, which is to set the grant date for a stock option award as the date a company’s board of directors or compensation committee approves the award, as long as employees are notified in short order and the award is non-negotiable.
The “exception,” as noted in the title of the proposed guidance, spares companies a logistical and administrative headache. That's because language in the original statement says companies must set the grant date as the date on which the company and its employee have a “mutual understanding” of the key terms and conditions of the option grant. Companies often approve grants for large groups of employees with a single board action, yet the companies also prefer to communicate the grants on a one-to-one basis with employees. Hence, adhering to the strict “mutual understanding” requirement, companies would find themselves setting individual grant dates for each employee, which would cascade into individual valuations to comply with new stock option expensing rules.
The FASB acknowledged in its guidance that, "For many preparers, the number and geographic dispersion of employees
receiving share-based payment awards limit the ability to communicate with each employee immediately after the awards have been approved by the board of directors."
Under the FASB's new guidance, that "mutual understanding" term will be presumed to exist at the date of the award, provided that the employee is informed in a "relatively short time period," and is prevented from negotiating key terms of the award.
While companies may find relief in the proposed staff position, which is open for comment until Oct. 1, the guidance still leaves room for debate about what length of time is reasonable for employees to be notified of their option award. FASB defined the period as the period an entity "could plausibly complete all actions necessary to communicate the awards to the recipients in accordance with the entity’s customary human resource practices."
Arguably, that could vary from company to company, said Ben Neuhausen, national director of accounting for BDO Seidman. “Some accountants are really uncomfortable with what’s a reasonable amount of time to communicate with employees,” he said. However, he doesn’t see any particular accounting advantage to be gained that might motivate a company to drag its feet in notifying its employees.
Exactly As Described
According to sources, the practical question about grant date and how companies should comply with new accounting rules erupted over the summer when accountants asked FASB staff for clarification on how it expected companies to comply with the “mutual understanding” requirement spelled out in its new share-based payment rules.
The details of the various exchanges have not been made available to Compliance Week, but in early August, PricewaterhouseCoopers published an alert to its clients saying FASB staff told the Big Four accounting firms that the “mutual understanding” requirement should be applied exactly as it is described in the original rule—that companies could not follow past practices and set the grant date according to board or committee approval of the grant.
“Under FASB Staff’s view, until the key terms and conditions of an award are communicated to the affected employee(s), there would not be a mutual understanding between the employer and the employee and therefore no grant date, even if communication were to occur within a short period of time after the award is approved,” PwC wrote.
Baksa
Barbara Baksa, executive director of the National Association of Stock Plan Professionals, said members burst into activity to determine how they could comply with such a requirement under existing human resource practices. “Many members considered revising their procedures,” she said, either to change the way the companies communicated grants or set the value of the options.
“There are very valid reasons why grants are not communicated immediately,” she said. “We heard from a lot of members who were very concerned.”
Devine
Michael Devine III, senior vice president and CFO of Coach, fired off a letter to FASB Chairman Robert Herz, saying he was surprised to hear that FASB “has held closed door meetings with representatives of the Big Four accounting firms, and without the benefit of public review and discussion, has agreed that the implementation of FAS 123(R) should include a literal interpretation of when a company has communicated stock option grants to its employees.”
Devine pointed out in his letter that option grants typically are not negotiable by employees, so there’s little meaning to the term “mutual understanding.”
Baksa said she believed FASB didn’t understand that fact. “I think FASB was under the impression that employees could negotiate the terms via the communication process, but that’s not the case,” she said.
The proposed position offered by FASB this week represents a reversal of its informal staff view as described by PwC and others in early August. Now FASB is taking the view that companies can continue to follow long-established practice.
FASB STAFF POSITION
The following excerpt is from Proposed FASB Staff Position No. FAS 123(R)-b, "Practical Exception to the Application of Grant Date as Defined in FASB Statement No. 123(R)":
... In determining the grant date of an award subject to Statement 123(R), assuming all
other criteria have been met, a mutual understanding of the key terms and conditions of
an award to individual employees shall be presumed to exist at the date the award is
approved in accordance with the relevant corporate governance requirements (that is, by
the Board or management with the relevant authority) if both of the following conditions
are met:
The recipient does not have the ability to negotiate the key terms and conditions
of the award with the employer.
The key terms of the award are expected to be communicated to all of the
recipients within a relatively short time period1 from the date of approval.
Effective Date and Transition
...The guidance in this FSP shall be applied upon initial adoption of Statement
123(R). An entity that adopted Statement 123(R) prior to the issuance of this FSP shall
apply the guidance in this FSP in the first reporting period beginning after the date the
FSP is posted to the FASB website.
Source: "Practical Exception to the Application of Grant Date as Defined in FASB Statement No. 123(R)"
After issuing the guidance this past week, at least one FASB member pointed the finger at accountants for elevating concern over the issue. Board member George Batavick was quoted in press reports as saying, “We all know this issue has been created by auditors that are unwilling to use any type of judgment, unwilling to look at past practice.”
Lynn Turner, a former staffer for the Securities and Exchange Commission and director of research for Glass Lewis, said accountants deserve the jab. “Accountants are speaking out of both sides of their mouth when they clamor for principle-based accounting while at the same time they demand the FASB provide really detailed guidance on what constitutes the grant date,” he said. “The language in the new rule was the same as in the old rule, which was over 10 years old. It demonstrates a woeful lack of common sense and judgment on the part of the profession.”
Baksa says the criticism is unfair. “They asked the FASB staff for guidance, and they were following what the staff told them to do,” she said. “Accounting firms are in a difficult position here.”
Moody
Lailani Moody of Grant Thornton said it was the companies who wanted to follow past practices and FASB who rejected it. “I think the companies were the ones annoyed” by the strict adherence to the language of the standard, she said. “Their view was that they thought it was reasonable to follow past practices. FASB said the words are clear.”
FASB spokesman Gerard Carney said, ““The wording in 123(R) was the same as 123, which was issued over ten years ago. We’ve issued additional common sense guidance because apparently there were differences in view on how to apply.” FASB declined any further comment.
Neuhausen said the issue represents a “manufactured crisis,” reflecting the current environment in corporate governance. “Everyone is concerned,” he said. “No one wants to be second guessed by the SEC or the PCAOB Public Company Accounting Oversight Board]. Accountants don’t want to be out on a limb.”
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