FASB, IASB Move Forward on Expensing; 2005 Implementation Date Likely

The Financial Accounting Standards Board (FASB) announced at its October 29, 2003 meeting that its new standards for equity compensation expensing would be effective for accounting periods starting in 2005, similar to the plan of the International Accounting Standards Board (IASB). FASB also announced that it would provide draft standards in February of 2004. FASB will require companies to adopt a "modified prospective" method for accounting for equity pay, so equity awards granted, modified, or settled after the effective date of the new rules, as well as unvested awards, would be covered. Unvested awards, however, would be subject to FAS 123 treatment, not whatever new standards are developed. IASB is taking a similar approach.

IASB also agreed, albeit reluctantly, to go along with FASB on the issue of treating the tax effects of equity pay not as an income item but as a credit or debit to paid-in capital. IASB also agreed to FASB's approach to treat each reload option grant as a new award, rather than being projected as a cost at the first granting of an award with a reload feature. Finally, in a potentially significant decision on performance vested awards, FASB has tentatively decided that companies can reverse compensation costs for awards that fail to vest for service or performance considerations. However, performance must be measured solely with reference to the company's own performance (profits, sales, etc.) rather than with reference to an external index, such as how the company's stock price does relative to other companies. This kind of market-based indexing has been a favorite proposal of reformers, but may be discouraged by these rules.