The Hindu Business Line : Time for a standard on share-based payments?

By issuing Statement No. 123, the Financial Accounting Standards Board has moved one step closer to the International Financial Reporting Standards.

There is a satirical definition of an accountant as being a person who solves a problem you did not know you had in a way you don't understand. Accounting Standards in their various combinations and interpretations were typically being seen this way due to their inherent complexities. However, it appears that the winds of change are blowing across accounting regulators globally.

The integration project of moving towards a single set of accounting standards globally is happening at a fast clip. The Financial Accounting Standards Board (FASB) in the US is re-looking at many of its standards and statements to tune them to the future of standards — the International Financial Reporting Standards (IFRS). It issued Statement No 123 and revised it in 2004. The reason for issuing the statement was said to be to simplify US GAAP and converging with international accounting standards.

Key provisions

Statement 123 requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognised over the period during which an employee is required to provide service in exchange for the award — the requisite service period (usually the vesting period).

No compensation cost is recognised for equity instruments for which employees do not render the requisite service. Employee share purchase plans will not result in recognition of compensation cost if certain conditions are met; the conditions are much the same as the related conditions in Statement 123.

A non-public entity, likewise, will measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of those instruments, except in certain circumstances. Specifically, if it is not possible to reasonably estimate the fair value of equity share options and similar instruments because it is not practicable to estimate the expected volatility of the entity's share price, a non-public entity is required to measure its awards of equity share options and similar instruments based on a value calculated using the historical volatility of an appropriate industry sector index instead of the expected volatility of its share price.

A public entity will initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the value of that award will be re-measured subsequently at each reporting date through the settlement date.

Changes in fair value during the requisite service period will be recognised as compensation cost over that period. A non-public entity may elect to measure its liability awards at their intrinsic value through the date of settlement.

Excess tax benefits, as defined by this Statement, will be recognised as an addition to paid-in capital. Cash retained as a result of those excess tax benefits will be presented in the Statement of cash flows as financing cash inflows. The notes to financial statements of both public and non-public entities will disclose information to assist users of financial information to understand the nature of share-based payment transactions and the effects of those transactions on the financial statements.

Benefits

This Statement eliminates the alternative to use Opinion 25's intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This Statement requires entities to recognise the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). Recognition of that compensation cost helps users of financial statements to understand better the economic transactions affecting an entity and to make better resource allocation decisions. By issuing this, the FASB has moved one step closer to IFRS standards. Time for an accounting standard on share-based payments in India?

(The author is a Hyderabad-based chartered accountant.)

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