A news release from the Financial Accounting Standards Board (FASB) said the 295-page FASB Statement No. 123 is the result of a two-year effort to improve the accounting for stock-option payment arrangements with employees (See FASB Hands Down Option Expensing Proposal ). That cost will now be measured based on the fair value of the equity or liability instruments issued, FASB said. Statement 123 covers a wide range of share-based compensation arrangements including stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee stock purchase plans, FASB said.
“Recognizing the cost of share-based payments in the financial statements improves the relevance, reliability, and comparability of that financial information and helps users of financial information to understand better the economic transactions affecting an enterprise and supports resource allocation decisions,” said Michael Crooch, FASB Board member and Board collaborator on the project, in the FASB statement.
Public entities (other than those filing as small business issuers) will be required to apply Statement 123 as of the first interim or annual reporting period that begins after June 15, 2005, FASB said. Public entities that file as small business issuers will be required to apply Statement 123 in the first interim or annual reporting period that begins after December 15, 2005.
According to the official announcement, FASB decided to provide nonpublic entities additional time to prepare for the implementation of Statement 123. Those entities will not be required to apply Statement 123 until the beginning of the first annual reporting period after December 15, 2005.
In addition to the accounting standard that details the financial reporting objectives and related accounting principles, Statement 123 also includes an appendix of implementation guidance on measuring the fair value of stock-based payment awards. In developing that guidance, the FASB said it included several special measurement provisions for private companies designed to ease implementation. The implementation guidance also includes numerous examples illustrating the accounting for common types of share-based payment arrangements.
Statement 123 replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used.
The FASB announcement said that approximately 750 US public companies are voluntarily applying Statement 123’s fair-value-based method of accounting for share-based payments or have announced plans to do so (See Survey: Large Companies Preempting FASB Stock-Option Rules ). The International Accounting Standards Board, whose standards are followed by companies in many countries around the world (See IASB Mandates Option Expensing in ’05 ), and the Canadian Accounting Standards Board have likewise issued accounting standards requiring companies in their respective jurisdictions to recognize the cost of employee services received in share-based payment transactions in financial statements.
More information about the new rule is at http://www.fasb.org/project/123r_faq.pdf .