Last week the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 123(R)-4:Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event. The guidance in this FSP amends paragraphs 32 and A229 of FASB Statement No. 123: Share-Based Payment.
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According to the FSP, a cash settlement feature that can be exercised only when a contingent event outside the employee’s control occurs, does not meet the conditions of paragraphs 32 and A229 until it is probable the event will occur. When the contingent cash settlement event becomes probable, the entity recognizes a share-based liability equal to the portion of the award attributed to past service for options or other similar instruments. The guidance is applicable only for options, or similar instruments, issued as part of employee compensation arrangements and shall be applied upon initial adoption of Statement 123(R). Entities that have already adopted Statement 123(R) shall apply this FSP guidance in the first reporting period after February 3, 2006, the date on which the FSP was posted to the FASB web site.
The majority of the Board supported the probability approach because it provides internal consistency between the classification of shares and options or similar instruments, then they are issued as employee compensation and embody a conditional obligation to transfer assets. Further, the majority of the Board did not believe an entity should arrive at a different classification based on whether the exchange for employee services was in the form of shares versus an option to purchase shares.