The world’s two most influential accounting rulemaking organizations sat down for a joint meeting last week to figure out how to resolve persistent differences in their standards. What’s interesting, say experts, is that while the International Accounting Standards Board and the Financial Accounting Standards Board are working to craft identical accounting principles, differences in the rules governing the implementation of those principles remain.
“Convergence doesn’t necessarily mean the same,” says D.J. Gannon, a Deloitte audit partner and the firm’s expert on international financial-reporting standards. In fact, Gannon says, there is no expectation that any of “the lingering differences” between rules that are already converged will be handled through standard-setting. “So the bottom line is that companies [reporting results under U.S. generally accepted accounting principles] are going to have to deal with those differences if they apply international financial-reporting standards at some point in the future.”
Gannon points to the already merged standards that govern the accounting treatment for share-based payments as an example. The standards, IFRS 2 and Topic 718 (formerly FAS 123R), were converged in 2008 — meaning they operate under the same principles — and essentially went into effect for companies at the beginning of this year. The principles governing both standards say the fair value of stock options must be treated as an expense on corporate income statements.
IFRS 2, one of the first projects the IASB worked on after the board was formed in 2001, required the expensing of stock options. “From that point on, FASB was under some pressure from the convergence effort to move in that direction,” adds Gannon. By 2006 FASB issued its revision of FAS 123, requiring companies to expense the value of stock options.
According to Gannon, the way companies measure the options expense under the two standards is similar. But the rules diverge with respect to how a company must recognize the expense. For example, consider a situation in which a company issues an employee a stock-option grant worth $1,000 on the grant date, under a four-year graded-vesting scheme, which means the total grant vests in equal parts and is allocated proportionately over the course of four years.
In practice, the employee earns 25% of the grant in the first year, another 25% in the second year, and so on until the employee is 100% vested at the end of four years. The graded-vesting plan is in contrast to a cliff-vesting scheme, in which the employee does not earn any part of the grant until the four years are up.
Under FASB ‘s Topic 718, the company has a choice in how it attributes graded-vesting stock options. Most companies, says Gannon, elect the straight-line method of accounting, in which the company parcels out the expense in equal portions over the vesting period. So, in the example, with all things being equal, the company would recognize $250 a year for the next four years.
But Topic 718 also allows companies to choose an accelerated method of recognition for graded-vesting options, which is more complicated but allows the company to take a larger expense earlier in the vesting period and less of a hit as the option matures.