FASB issues an update for accounting for certain performance-based awards

by Cydney Posner

FASB has released an accounting standard update related to the accounting for certain performance-based equity awards under FASB ASC Topic 718, Compensation—Stock Compensation. The title of ASU 2014-12 tells the story: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. Why should securities lawyers care?  One reason is that equity compensation reported in the comp tables under S-K Item 402 is tied to the accounting treatment for those awards.

Performance-based equity awards are fairly common these days. Often, awards vest based on both time and satisfaction of the performance condition (such as achievement of specific financial metrics), with employment or service typically required until the performance target is achieved. Sometimes, however, the award may provide that the performance target may be achieved after completion of the required service period.  Prior to issuance of the ASU, there was no explicit guidance as to the proper accounting treatment for those awards.  As a result, companies took different approaches. Many companies took the position that performance targets that could be achieved after the requisite service period were performance conditions that affected the vesting of the award but did not affect the award’s grant-date fair value; other companies did not view the performance condition as a vesting condition at all, but instead took the performance targets into account when estimating the grant-date fair value of the awards.  The ASU was intended to resolve these inconsistencies.

The ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition, with the result that it would not affect the estimate of the grant-date fair value of the award.  Compensation cost would then be recognized when achievement of the performance target becomes probable, to the extent

that the requisite service has been rendered. If achievement of the performance target becomes probable prior to the end of the requisite service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered would be recognized prospectively over the remaining requisite service period.

The ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and can be applied either prospectively or retrospectively. Earlier adoption is permitted.

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