A review of Financial Accounting Standards Board (FASB) guidance on share-based payment transactions found that the 2004 standard achieves its purpose and provides useful information to investors and other users of financial statements.
However, the review team noted that the standard could be more difficult for private companies to understand and apply than public companies. Private companies could also incur much higher costs.
FASB Statement No. 123(R), Share-Based Payment, focuses on accounting for transactions in which a public or private company exchanges its equity instruments for employee services.
The standard also addresses transactions in which a company incurs liabilities in exchange for goods or services that are based on the fair value of its equity instruments, or that may be settled by the issuance of those equity instruments.
FASB Chairman Russell Golden said the post-implementation review (PIR) team of the Financial Accounting Foundation, FASB’s parent organization, identified several positive aspects of the share-based payment standard, including its usefulness to investors.
However, Golden noted that private company stakeholders told the PIR team that the standard is sometimes difficult to understand and costly to apply. The feedback was consistent with input the FASB recently received from stakeholders through outreach for its US Generally Accepted Accounting Principles (GAAP) simplification initiative and for pre-agenda research for the Private Company Council (PCC), according to Golden.
“Although we do not plan to undertake a comprehensive review of the standard, we will continue our outreach to stakeholders to identify improvements to account for share-based payment transactions,” Golden said in a written statement on August 19. “The FASB staff will bring the results of the outreach to the board and the PCC later this year for discussion.”
After examining input from investors and other financial statement users, preparers, auditors, and academics, the review team concluded the following in its report:
- Statement 123(R) addressed the concerns of users and others that companies were not recognizing in earnings the cost of employee services received in exchange for share-based payment awards. It increased comparability and simplified accounting for share-based payment transactions by eliminating alternative accounting methods previously allowed. The rule also converged, to a large extent, the accounting for share-based payment transactions with IFRS 2, Share-Based Payment.
- The standard provides investors with useful information – as many investors factor both the recognized compensation cost associated with share-based payment awards in earnings and other information about share-based payments into their analyses. For example, investors use the information to analyze the nature of a company’s share-based payment awards and projections of a company’s future earnings and cash flows, the PIR found.
- For public companies, Statement 123(R) is generally understandable, can be applied as intended, and results in reliable information. However, the standard is often more difficult for private companies to understand and apply as intended, primarily because of the complexity of the financial instruments they use for share-based payment awards and their lack of internal expertise.
- Ongoing costs incurred by public companies to comply with Statement 123(R) are not significant when considered in totality. Private companies incur significant ongoing costs when measuring share-based payment awards, estimating forfeiture rates, and determining whether a share-based payment award should be classified as equity or a liability. The review found that private companies incur significant costs in those areas because of the complexity of the awards granted and because they typically lack the internal expertise to comply with the standard’s requirements.
- While the changes made to financial and operating practices as a result of Statement 123(R) could be considered significant, these changes were consistent with expectations. No unexpected significant changes to financial reporting or operating practices resulted from the standard.
- There were not any significant unanticipated consequences as a result of Statement 123(R).
The PIR team made no significant standard-setting process recommendations as a result of the review. Click here to download the team’s formal report. Click here to download FASB’s response letter to the report.