September 10, 2003 Board Meeting
Equity-based
compensation (formerly stock-based compensation). The Board discussed
several issues relating to the valuation of employee equity-based
compensation arrangements classified as equity. The Board decided
that:
- Equity instruments issued to employees and the cost of the services
received as consideration should be measured and recognized based on the
grant-date fair value of the equity instruments issued. That requirement
would apply to all entities, including nonpublic entities (nonpublic
companies would no longer be permitted to use the minimum value method
allowed under FASB Statement No. 123, Accounting for Stock-Based
Compensation). The Board decided, however, that in those situations
in which it is not possible to estimate the fair value of an
equity-based compensation award at the grant date, the award would be
measured at its intrinsic value on each reporting date through the
exercise date.
- The definition of fair value would be consistent with the tentative
agreed-upon definition resulting from the Board's project on fair value
measurement, which is consistent with the definition in Statement 123
and FASB Concepts Statement No. 7, Using Cash Flow Information and
Present Value in Accounting Measurements. Therefore, an entity
should measure the fair value of equity instruments granted based on
market prices, if available, taking into account the terms and
conditions upon which those equity instruments were granted, consistent
with the notion of a fair value hierarchy as conveyed in Concepts
Statement 7.
- The requirements in Statement 123 that entities estimate the grant
date fair value using an option-pricing model that takes six factors
into account would be retained. That requirement would be revised to
indicate that entities consider, at a minimum, the six factors
identified and to allow other factors to be considered when appropriate.
- The term expected life would be replaced with the term
expected term, meaning an entity must consider the contractual
life of the option and effect of employee early exercise behaviors on
that contractual life. Use of expected life as an input in an
option pricing model (as described in Statement 123) would not be
precluded.
- The reference in paragraph 19 of Statement 123 to the phrase (for
example, the Black-Scholes or a binomial model) would be removed. A
comparative example illustrating the use of alternative valuation models
would be included in an appendix.
- The guidance in Statement 123 regarding restrictions after the
vesting period would be retained. The Board directed the staff to
develop for the Board's consideration at a subsequent meeting additional
language regarding factors that should be considered when estimating the
fair value of restricted shares.
- The grant-date fair value estimate of an equity-based compensation
award should include consideration of market-based conditions (such as a
target stock price or some amount of intrinsic value) and, for those
types of awards, that compensation cost would not be reversed if the
award does not vest or becomes exercisable because the award fails to
achieve the market-based condition.
- Changes in expected forfeitures through the vesting date should be
recognized in the period of the change (for example, as a change in
accounting estimate).
- The guidance in paragraphs 32 and 33 of Statement 123 regarding the
treatment of dividends and dividend equivalents when estimating the
grant-date fair value of equity-based compensation awards would be
retained. However, the election in paragraph 32 to accrue compensation
expense related to nonforfeitable dividends paid on shares that do not
vest as if all instruments granted are expected to vest and recognize
the effects of actual forfeitures as they occur would be eliminated.
- Each reload award would be accounted for as a new award and would be
measured at the fair value of the reload award.
The Board also discussed the scope of the equity-based compensation
project and made the following decisions:
- The Board decided that this project should be conducted in phases
that would result in several Exposure Drafts. The first phase would
address the accounting for stock-based compensation with employees. The
Board noted Statement 123 broadly applies to all entities, including
incorporated entities that issue ownership interests in forms other than
stock. As a result, the project was renamed Accounting for equity-based
compensation. The Board plans to discuss the definition of
equity-based compensation at a future meeting.
- Although the scope of the first phase includes equity-based
compensation transactions with employees, the Board noted that there
are a number of questions about how a grant-date fair-value-based
method of accounting would be applied to employee stock ownership plan
(ESOP) transactions. The Board decided it would address the accounting
for those plans in a subsequent phase of the project that would result
in a separate Exposure Draft. As a result, the scope exclusion in
Statement 123 would be retained and the guidance in AICPA Statement of
Position 93-6, Employers・Accounting for Employee Stock Ownership
Plans, would continue to apply.
- The current accounting for nonemployee equity-based compensation
transactions in Statement 123 will be reconsidered in a subsequent
phase of the project that will result in a separate Exposure Draft. As
a result, the guidance for such transactions in Statement 123 and
related interpretative guidance such as EITF Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services,・would continue to apply.
- Employee stock purchase plan (ESPP) transactions will be addressed
in the current phase of the equity-based compensation project. The Board
also reconsidered the criteria in Statement 123 for determining whether
an ESPP is not compensatory and decided to change them. The Board
decided that an ESPP is not compensatory only if the terms of the
employee plan are the same as those available to all shareholders of
that same class of equity.
- FASB Technical Bulletin No. 97-1, Accounting under Statement 123
for Certain Employee Stock Purchase Plans with a Look-Back Option,
which provides fair-value-based measurement guidance for ESPP
transactions, would be amended for any value measurement decisions made
by the Board. This guidance would be included as an appendix to the
proposed Statement.
- The Board also began consideration of the nature and extent of
application and implementation guidance that should be included as part
of this proposed Statement. The Board directed the staff to review
existing interpretative guidance in FASB Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation,
and EITF Issue No. 00-23, 的ssues Related to the Accounting for Stock
Compensation under APB Opinion No. 25 and FASB Interpretation No. 44,・
to identify those issues that might be relevant under its proposed
fair-value-based method of accounting for consideration at a future
meeting.
The issuance date of the Exposure Draft is now scheduled for the first
quarter of 2004. The Board set a goal of completing its redeliberations
and issuing a final Statement in the second half of 2004.
FASB EXPOSURE DRAFT AVAILABLE
The Board issued FASB Exposure Draft, Employers・Disclosures
about Pensions and Other Postretirement Benefits, on September
12, 2003. Comments are requested by October 27, 2003. If you do not have
access to the Internet, you can receive a printed copy by calling the FASB
Order Department at 1-800-748-0659.
PROPOSED FASB STAFF POSITION
On September 17, 2003, the Board directed the staff to release proposed
FSP FIN 46-e, "Effective Date of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, for Certain Interests
Held by a Public Entity," for comment. That proposed FSP will be
posted to the FASB website by September 23, 2003, for a 30-day comment
period.
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