FASB has updated accounting standards on stock compensation to resolve diverse accounting treatments of awards linked to performance targets, such as an initial public offering or a specific profitability metric, that could be longer-term than the recipient’s employment.
Current U.S. GAAP does not contain explicit guidance on how to account for share-based payment awards that require a specific performance target to be achieved for employees to become eligible to vest in the awards.
FASB’s update, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period, which was released Thursday, addresses the guidance gap.
The amendments require that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition.
A reporting entity should apply existing guidance on Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award.
Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the service has already been rendered. If it becomes probable that the performance target will be achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period.
The total amount of compensation should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest.
The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved.
For all entities, the amendments take effect for annual periods and interim periods within those annual periods beginning after Dec. 15, 2015. Earlier adoption is permitted.
Entities may apply the amendments either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter.
Under IFRS, the accounting treatment for share-based payments linked to performance targets is different.
A December 2013 amendment issued by the International Accounting Standards Board specifies that a performance target cannot extend beyond the end of the service period. Targets that could be achieved after the requisite service period are accounted for as nonvesting conditions that are reflected in the grant-date fair value of the award.
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Sabine Vollmer (
svollmer@aicpa.org
) is a JofA senior editor.
