A chart comparing the key considerations for common types of modifications to equity awards.
Written for readers without an accounting background, this article provides a summary of the treatment of stock compensation under US GAAP. Also includes highlights of differences between the US GAAP and IFRS with respect to stock compensation.
On March 13, 2014, in response to a persistent issue regarding the recognition of expense for performance awards, the Financial Accounting Standard Board's ("FASB") Emerging Issues Task Force ("EITF") determined that a performance target which can be achieved after an employee provides the requisite service, is a performance condition that affects the vesting of the awards (not a condition that can affect the grant date fair value of the awards). Therefore, compensation cost should be recognized if it is probable that the performance condition will be achieved. This EITF ruling narrows the scope of acceptable accounting practices, only allowing the use of the performance condition approach.
Proxy advisory firm ISS provides an FAQ addressing questions about how they evaluate U.S. equity plans.
Equity-based compensation – whether in the form of stock options/stock appreciation rights (SARs), restricted
stock/restricted stock units (RSUs) or performance shares – is an integral part of executive long-term incentive
programs. A common provision in the governing documents addresses how an executive's unvested interests are
treated if there is a change in control of the company. Since a significant portion of an executive's wealth is often
tied to the value of equity-based compensation, the conditions for accelerated vesting are particularly important.
Many companies, knowing that out-of-the-money, or underwater, share options can affect
the morale and retention of key employees, are considering whether and how to modify
outstanding awards. Companies exploring strategies should understand their accounting
implications as well as the business, organizational, and regulatory concerns that are the
context for the strategies. This edition of Defining Issues describes the accounting implications
of the more common approaches and some basic factors that should be considered when a
company tailors a strategy to its specific circumstances.
How to account for acceleration of vesting upon termination of employment, explained in fewer than 75 words.
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