FASB Considering Simplifications for Stock Compensation Accounting

At its meeting on December 17, 2014, the Financial Accounting Standards Board (FASB) began efforts to simplify the accounting for private companies that offer stock options for their employees. Private companies, those companies meeting the definition of a private company in Accounting Standards Update (ASU) No. 2013-12, Definition of a Public Business Entity, told FASB that the accounting for stock compensation awards is too complex, especially since some of the incentives never get cashed in because the business fails or because the business does not make as much money as expected.

More Flexibility

If the FASB decision is finalized, the alternative accounting for private companies would offer more flexibility for calculating the expected term of stock awards, the classification of awards with repurchase features, and how to measure the liability of potential awards.

Simplified Method

To simplify how a company determines the expected term of employee share option awards, FASB discussed allowing what is called a "simplified method" that allows the expected term to be the midpoint between the vesting date and the contractual term. If there is a performance condition attached to the award and the target is not likely to be met, then a business would use the contractual term as the estimate. FASB also voted to allow private companies to measure their awards at intrinsic value instead of fair value. Intrinsic value is the difference between the fair value of the underlying shares and the exercise price. Finally, FASB agreed that awards with repurchase features tied to certain conditions, such as earnings threshold, would also qualify for simplifications.

FASB held off on deciding how to make disclosures in the area of stock compensation accounting less burdensome. Disclosure simplification will be discussed during separate deliberations. As more information becomes available from FASB, Eide Bailly will be providing additional communication.

For further information, please contact your local Eide Bailly professional.