FASB to Clear Up Grant Award Date Conflict

September 15, 2005 (PLANSPONSOR.com) - The Financial Accounting Standards Board (FASB) is issuing additional guidance on the definition of grant date when awarding employee stock options.

The concern has arisen since the issuance of FAS123 requiring companies to list employee stock option awards as expenses on their financial statements.

In its September 14 meeting handout on the issue of a proposed FASB Staff Position (FSP) on the definition, the FASB notes that statement 123 defines the grant date as “the date at which an employer and employee reach a mutual understanding of the key terms and conditions of a share-based payment award.”

FASB said in its handout that most employers were interpreting this to mean “the grant date is the date an award is approved in accordance with their corporate governance provisions, so long as the approved grant is communicated to employees within a reasonable period of time from the date of approval.”

The problem with this interpretation is that companies often communicate the award in person to the employee and this could be weeks from the date the award is approved, during which time share prices change.

In a letter the FASB received from the National Association of Stock Plan Professionals (NASPP), they said, “any fluctuation in the price of the securities subject to the award between the date the award is approved and the date it is communicated to the employee will affect the amount of compensation cost to be recognized by the company for the award,” BNA reports.

In response to the conflict the Board voted to issue an FSP on a “practical exception related to mutual understanding.”   The practical exception allows employers to use the approval date as the grant date as long as terms are not changed prior to communicating the award to the employee, the employee can not change the terms of the award, and the award is communicated to the employee within a reasonable time from the approval date.

In addition, the Board said the practical exception should be adoption when a company first adopts FAS123 or in the first reporting period beginning after the date the FSP is posted if a company has already implemented FAS123.

The FSP will be issued on  www.fasb.org by September 15, and is subject to a 15 day comment period.