The Compensation Committee Handbook, 4th Edition

CHAPTER 9 Accounting Rules and Issues

This chapter discusses relevant and important accounting standards that compensation committees need to know in order to carry out their duties and responsibilities to the company and its shareholders. Of primary importance is the treatment of equity-based compensation and performance-based (both equity-based and cash-based) incentive compensation. The rules relating to the expense charges associated with incentive compensation changed dramatically when Statement of Financial Accounting Standards No. 123 (Revised) (referred to as FAS 123R) became effective in December 2005.

This chapter is divided into the following topics:

• Overview of accounting rulemaking organizations and standards, pronouncements, and other rules issued by such organizations
• The new equity-based compensation accounting rules
• The old equity-based compensation rules, which are no longer applicable, but which are provided for current issues involving stock option backdating and financial restatements
• Other significant accounting rules

Overview

This chapter provides a fundamental working knowledge of the relevant accounting principles, standards, and issues that most compensation committee members will encounter in discharging their committee duties. It is not intended to be comprehensive; rather, it attempts to familiarize the compensation committee member with the accounting regulatory and organizational framework and the various relevant accounting pronouncements ...