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FASB Clarifies Guidance on Accounting for Share-Based Payments

FASB Clarifies Guidance on Accounting for Share-Based Payments

In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (Update) 2014-12 regarding stock compensation. The Update clarifies the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period.

Why Is the FASB Issuing This Update?

Companies will often issue share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest. These performance targets often include revenue metrics, IPO transaction, or other profitability goals. Occasionally, the company will allow these performance targets to be achieved after the employee completes the requisite service period. This is often the cash when an employee is nearing retirement.

The FASB identified that companies were treating the compensation cost on these types of awards differently, as the original guidance (Accounting Standards Codification (ASC) 718 – Compensation – Stock Compensation) did not contain explicit guidance on how to account for those share-based payments.

Scope and Application of the Accounting Standards Update

The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period, be treated as a performance condition. ASC 718 indicates that a performance condition should not be reflected in estimating the grant-date fair value of the award; however, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved.

At the date it is determined to be probable, a company would recognize compensation cost attributable to the period for which the requisite service period has already been rendered (typically from grant date through the date the target was determined probable). If the performance target is probable of being achieved prior to the end of the requisite service period, the remaining unrecognized compensation cost shall be recognized prospectively over the remaining service period.

Users should note that this guidance differs from that of the International Accounting Standards Board (IASB). The IASB requires awards with these targets be accounted for as non-vesting conditions which would be reflected in the grant-date fair value of the award.

Who Is Effected by This Update?

The amendments in this Update apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period.

Effective Dates

The Update is effective for fiscal years that begin after December 15, 2015 and allows companies to adopt the guidance either (a) prospectively to all awards granted after the effective date, or (b) retrospectively to all outstanding awards with performance targets as of the earliest annual period presented.

Prepare Your Business for the Update

If you require assistance with managing your share-based payment awards, determining the compensation costs to recognize, or other features of ASC 718, contact Signature Analytics.

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Understanding the New Revenue Recognition Standard

Understanding the New Revenue Recognition Standard

On May 28, 2014, the International Accounting Standards Board (IASB), responsible for International Financial Reporting Standards (IFRS), and the Financial Accounting Standards Board (FASB), responsible for U.S. Generally Accepted Accounting Principles (U.S. GAAP), jointly issued a converged standard on the recognition of revenue from contracts with customers.

The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (i.e., payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (e.g., service revenue and contract modifications), and improve guidance for multiple-element arrangements.

Who is Impacted?

Potentially anyone who accounts for revenue under U.S. GAAP or IFRS and enters into contracts with customers. Industries which are most impacted are software, real estate, and telecom.

Scope of the New Standard

The revised standard replaces all existing U.S. GAAP and IFRS revenue recognition guidance and includes guidance on the following:

  • Revenue contracts with customers
  • Sales / transfers of non-financial assets outside of the entities’ ordinary activities

Application of the New Standard

There are five steps to apply the new standard:

new-rev-recognition-std

In addition to the steps above, there are revised disclosure requirements related to revenue recognition.

The steps above are not required for all sales. For example, a simple point of sale transaction for one discrete product for consideration paid at the time of purchase would only have one performance obligation and therefore there is no need to go through an allocation process as described above.

Transition Effective Dates

For U.S. companies the effective date for implementation is reporting periods beginning on or after December 15, 2016 with a one year deferral for nonpublic entities.

Additional Resources

For a quick overview of the standard, I recommend listening to the one-hour pre-recorded webcast from the FASB / IASB from June 5, 2014.

For a more detailed look, the Big-4 accounting firms have each published guidance on their websites:

Prepare Your Business for the New Standard

Understanding the new revenue recognition standard can be complex and time consuming. If you have questions about the new revenue recognition standard and its impact on your business, contact us for a free consultation.

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