IFRS May Prompt Revamp of Pay Plans

The differences between U.S. and international accounting rules could affect the way American companies compensate their employees.

Companies that adopt international financial reporting standards will need to reexamine their compensation and employee benefit plans. The switchover from U.S. generally accepted accounting principles to IFRS will not only translate into tweaks regarding how companies account for such programs — but could also change plan design because of the way international rules affect corporate financial statements, according to Deloitte.

“The interplay between the broader impact of the transition to IFRS will require companies to assess their compensation philosophy and plan design,” said Deloitte Tax partner Grace Melton during a recent webcast. She says companies will want to review employment agreements to assess how IFRS affects specific levels of executive compensation, as well as the impact on broad-based types of compensation plans.

Melton considers compensation and benefit plans one of the “most high profile” areas to be affected by IFRS, and her warning highlights the extra workload the transition is likely to bring to U.S.-based finance departments. Under the Securities and Exchange Commission plan, most publicly traded companies would have up to eight years to prepare for IFRS, but the impact will be felt beyond corporate finance, spilling over into human resources and information technology departments, say experts.

One way a switch to IFRS may affect compensation relates to how some companies would be forced to rejigger metrics for performance-based pay. For example, if executives’ performance is tied to company revenue, then the timing differences between when IFRS users and U.S. GAAP users recognize revenue would have an affect on executive payouts.

Indeed, PricewaterhouseCoopers suggests that companies should reassess if bonus targets and metrics need to be revised, and whether changes to compensation agreements should be rewritten ahead of a switch to IFRS.

Before companies begin to tackle those questions, however, they may want to first compare differences in how IFRS and GAAP treat specific pay programs. For instance, valuations of stock-option grants can differ, depending on whether a company uses the international rule known as IFRS 2, or the U.S. rule FAS 123(R), the standards for accounting for share-based payments.

In addition, IFRS requires companies to record their expense for awards with graded vesting on an accelerated basis. Under U.S. GAAP, companies can choose between taking that method or they can amortize the entire grant on a straight-line basis. In turn, companies that use the latter method would, for example, treat one stock option grant that vests 25 percent over four years as four separate grants for the purposes of expensing, Melton noted.

Another “significant” change for current GAAP users, according to Melton, is the changes employers will have to make related to estimating payroll taxes for share-based payments. For U.S. GAAP, the liability is recognized when an award is exercised. On the other hand, IFRS requires that liability to be recognized earlier, at the grant date or as the employee’s services are provided.

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