In a 5-2 vote, the nation’s accounting rulemakers shifted from the general language handed down earlier this year that all forms of share-based payments to employees would be treated the same as other forms of compensation by recognizing the related cost in the income statement, according to Washington-based legal publisher BNA. Many in the industry said such an accounting treatment would be the death knell to ESPP plans.
Under the new guidance approved by the Norwalk, Connecticut-based FASB on September 8, if the stock price discount offered to plan participants “results in proceeds to the employer that are not less than the proceeds it would receive in an offering of shares,” such as those in a wider offering through an underwriter, then the ESPP would not have to be included in related compensation expenses associated with the previous proposed Exposure Draft (See The Bottom Line: Expensing Proposition ).
Thus, ESPPs will be treated under a two-principle approach.
The first principle is contained in the phrase “not less than the proceeds,” which calls for satisfaction of one of the two criteria in order to have an ESPP not be deemed compensatory and not lead to “recognizable compensation cost.” The other principle is to state that “the terms of the ESPP are no more favorable than those available to all holders of the same class of shares,” according to a staff handout distributed at the meeting.
In simple terms, FASB said ESPPs offering discounts of no more than 5% will not have to be counted as a compensation expense. To arrive at this, FASB voted to continue use of the wording in FASB Number 123 to provide guidance on that notion: “A discount of 5% or less from the market price shall be considered to comply with this criterion without further justification.” The move being made primarily by FASB to avoid future requests for implementation guidance if it did not include a safe harbor stating a specific percentage for the market price discount.
FASB also freed up earlier prohibitions on ESPP-linked stock buybacks. As the guidance originally read, a company carrying out a stock repurchase while offering employees the chance to buy shares through an ESPP would have to count the ESPP plan as a compensation expense. The new guidance, however, would drop ESPPs with associated stock buybacks from the list of share-based compensation vehicles that would have to be expense, provided the ESPP met the other standards for exclusion.
Official guidance on the tax treatment of ESPPs will be included in FASB’s final rules on stock-based compensation, which are expected to be handed down sometime in the fourth quarter.
A copy of FASB’s pre-hearing handout, which includes the proposals for the tax treatment of ESPPs to be considered, is available at http://www.fasb.org/board_handouts/09-08-04.pdf .