Wiley GAAP 2008

FAS 123(R): Detailed Explanation

FAS 123(R) broadly addresses share‐based payments. It covers plans for employees that convey shares of the employer's stock, derivatives (such as options) related to the employer's shares, or cash in amounts tied to the value of the employer's shares. All share‐based plans are considered compensatory unless the benefit to employees is no greater than that which is available to shareholders generally. The benefit to recipients is assessed based both on the discount from market price and the number of shares they are eligible to buy. Consequently, virtually all plans will be considered compensatory for accounting purposes, including employee stock purchase plans that are noncompensatory under the federal tax laws. This represents a change from APB 25, under which noncompensatory plans for tax purposes were also noncompensatory for accounting proposes. The new rules are even somewhat stricter than those set forth under FAS 123.

Additionally, FAS 123 (R) modifies FAS 123 as to (1) the prescribed pattern of compensation cost recognition, (2) the accounting for employee stock purchase plans, and (3) accounting for the income tax effects of share‐based transactions. It also amends FAS 95 to require that excess tax benefits be reported in the cash flow statement as a financing activity, rather than as an operating activity (these are currently reported as a reduction of income taxes paid).

Scope

FAS 123(R) was the result of a “limited scope” effort to ...