FASB Stock Option Accounting Simplification: Mark to Market Accounting for Compensation?

By Mike Gullette

The Financial Accounting Standards Board’s latest effort to simplify accounting standards focuses on expenses related to stock option compensation. At first, the proposal appears very encouraging: companies will have the option to account for forfeitures as the options expire – that can make things easier. Further, the statutory tax withholding rate threshold that triggers liability accounting will be raised to the maximum statutory rate of the employee. This will make the employees happy, as the hassle of partially settling the award in cash no longer will be needed.

So, what’s not to like?

Currently, companies must determine, for each award, whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes results in either an excess tax benefit (ETB) or a tax deficiency. ETBs are recognized in additional paid-in capital (APIC); tax deficiencies are used to offset accumulated ETBs, if any, or recognized in the income statement. Granted, maintaining “APIC pools” to monitor accumulated ETBs is a little complex. So, FASB is proposing to eliminate the APIC pools and run everything through the income statement. Easy, but the ETBs and deficiencies, which result from movements in the price of the company stock, will not go away. As a result, bank net income may often be affected by the volatility in its company stock – a mark to market impact and one the company has little or no control over.

Bankers have never liked marking anything to market, whether it is their loan portfolio or their stock options. With razor thin margins in the current environment, it seems the last thing bankers need is an unpredictable (and unsolvable) expense running through the income statement. However, the standard, if approved, will affect all industries. So, it will be interesting to see how other industries react to the proposal.

FASB has yet to set an effective date, so any change is likely to come no earlier than 2016.


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