Last week the Financial Accounting Standards Board agreed, albeit reluctantly, to further explain just what it means by “grant date” and “mutual understanding.”
FASB’s new proposal responds to several inquiries by auditors about Statement 123R, the board’s controversial revised rule on stock-option expensing. The phrase at issue reads, “The date at which an employer and an employee reach a mutual understanding of the key terms and conditions of a share-based payment award.”
In practice, most companies have considered the grant date to be the date that the board of directors approve an award, provided that this information is then communicated to employees within a reasonable period of time. But wary of being second-guessed by regulators, some auditors have pressed FASB for more clarity; among their concerns was that companies and employees don’t have “mutual understanding” until the information is passed along.
Many companies insist that managers discuss these grants with employees one-on-one, but a company with thousands of workers dispersed across multiple offices may need several weeks to meet with every employee affected. If the share price rises significantly during that period, the company might be required to recalculate a higher value for the grants and therefore record a greater compensation expense. Some observers raised an even more maddening prospect: A company that communicated grant information on several different dates might need to calculate several grant values and record several different sets of compensation expenses.
At last Wednesday’s meeting, several board members were frustrated that they had been asked to create more-specific guidance, particularly so soon after issuing the revised options-expensing standard and considering that the definition of “mutual understanding” had not changed. “When we were writing 123R, we didn’t have any indication that this was going to be a problem,” said Crooch. “I think we have to do something, but this is one of those things where we’re getting a bad name.”
“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,” added board member George Batavick.
That said, FASB’s new proposal would allow companies to retain that “personal touch” of communicating individually with employees, says Crooch, while avoiding the difficulties associated with recalculating grant values. The board determined that if all other criteria are in place, the “mutual understanding” can be presumed to have been met on the grant date if 1) the employee doesn’t have the ability to negotiate any of the key terms, and 2) the key terms are expected to be communicated to employees within a “relatively short time” from the date of board approval.
A “relatively short time,” in the board’s eyes, is the period in which a company could plausibly complete all the actions necessary to communicate the information to individual employees. FASB isn’t spelling out how that communication must be made or what documentary evidence must be created to ensure that the employee has an understanding of the information.
FASB’s decision “pretty well resolves this issue for most companies,” says Ben Neuhausen, national director of accounting at BDO Seidman, though he believes that the board’s original definition of “mutual understanding” was understandable enough. In light of the risk that the Securities and Exchange Commission might second-guess decisions, however, Neuhausen observes that “some accountants are gun-shy
The proposal has a 15-day public comment period. Issuers with fiscal year-ends of June 30 will be able to apply the guidance concurrent with their adoption of Statement 123R.
This Wednesday, the board will discuss:
• Accounting for rental costs incurred during a construction period;
• Disclosure guidance for nontraditional loan products
• Guidance relating to the accounting for the tax effects of share-based payment awards
• Short-term convergence: earnings per share
• Conceptual framework; and
• Revenue recognition.