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FASB Update - Transitional Matters

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February 10, 2015 | Barbara Baksa

FASB Update - Transitional Matters

I blogged back in October that the FASB has announced amendments to ASC 718 (Proposed Amendments to ASC 718 - Part I and Part II).  Some of you may be wondering what happened with that project.  The answer is that the FASB is still working on it.  They have been meeting to discuss transitional issues and other projects related to the simplification of ASC 718.

The FASB met last Wednesday, February 4, to decide a number of transitional matters.  I listened to the meeting; here are my observations.  First, even though February 4 was my birthday, the FASB did not appear to be celebrating this in any way. In fact, it appeared that they did not even know it was my birthday.  Go figure.

Share Withholding

The FASB debated whether the transition to the new share withholding guidance should be on a modified retrospective basis (essentially, companies switch over to the new method for all outstanding awards with an adjustment in the current period to account for the change) or a prospective basis only (the guidance would only apply to new awards) and decided on the modified retrospective approach.  The discussion on this matter seems largely theoretical to me. The transitional guidance would only be a concern for companies that are currently subject to liability treatment due to their share withholding practices.  In my experience however, there are very few, if any, companies that fall into that bucket. Most companies have carefully structured their share withholding procedures to avoid liability treatment so they don't need to worry about any transition.

Estimated Forfeitures

The transition for changing from estimating forfeitures to accounting for forfeitures as they occur garnered even more discussion, with one FASB staffer recommending that companies be given a choice between the modified retrospective and prospective approaches.  I guess there was a concern that companies wouldn't be able to figure out the appropriate adjustment necessary to switch over to the new guidance using the modified retrospective method. But Board members were worried about confusion resulting from two different transition methods, so they decided to require the modified retrospective method.

I think that this whole area is so confusing as to be completely inscrutable to investors.  Your auditors barely understand it.  So while I appreciate the concern about confusion, personally I can't see that a modicum more confusion is going to make any difference here.

But, having said that, I also can't believe that companies would want to switch over to accounting for forfeitures as they occur on a prospective basis. That would leave companies applying an estimated forfeiture rate to awards granted prior to specified date but not after that date (or maybe to employees hired before a specified date—it was a little unclear from the Board's discussion).  That seems crazy complicated to me. My guess is that if companies can't figure out the adjustment necessary to switch over to accounting for forfeitures as they occur, they'll just continue to apply an estimated forfeiture rate.

Tax Accounting

For as controversial at it is, there was very little discussion among Board members of the transition to accounting for all excess benefits/shortfalls in the P&L.  I guess the accounting is controversial but the transition is relatively simple. The Board decided on prospective approach. As I understand it, once the amendments are in effect, companies will just switch over to recognizing benefits/shortfalls in the P&L—the journal entries they were making to paid-in-capital to account for tax effects will now be made to tax expense.

- Barbara

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