Stock Compensation – New Accounting Guidance
James Boissonneault, Audit Senior Manager
In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-12 Compensation—Stock Compensation (Topic 718). This ASU addresses the issue of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the required service period ends. Common performance targets include a sale of stock in an initial public offering or obtaining a defined level of profitability. Targets like these can be long term in nature and may or may not be probable. Before ASU 2014-12, the guidance was silent on circumstances where an employee completed the required service period, and the performance target had not yet been met, but could be met in the future.
The key to applying the new guidance will be determining when the performance target becomes probable. For an award in which the required service period has been completed and the performance target becomes subsequently probable, the compensation costs attributable to the period(s) should then be recorded in the period the performance target is probable. In this circumstance, there may be years over the required service period in which compensation costs are not recognized because the performance target is not probable. If the performance target becomes probable before the completion of the required service period, then the remaining compensation costs should be recognized over the remaining required service period.
FASB’s stance on this issue does differ from International Financial Reporting Standards (IFRS). IFRS has taken the stance that a performance target cannot extend beyond the end of a service period.
ASU 2014-12 will be effective both for private and public companies for annual periods beginning after December 15, 2015, and early adoption is allowed. Adoption of the new guidance can be applied in two ways: first, the amendment can be applied prospectively by applying the new guidance to all awards granted or updated after the effective date. Second, the amendment could be applied retrospectively. This would entail evaluating all awards outstanding at the earliest period presented in the financial statements. If this is the case, an adjustment to opening retained earnings likely will be required.
If you have any questions about ASU 2014-12, please contact James Boissonneault or your BNN audit professional.
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