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The Employee Ownership Update

Corey Rosen

September 11, 2003

(Corey Rosen)

FASB Delays Date for Issuing Options and Other Equity Pay Expensing Rules

The Financial Accounting Standards Board (FASB) has delayed the date it intends to issue proposed rules for expensing stock options and other equity compensation until the first quarter next year, with final rules then due out in the third quarter. The move conforms with a recent announcement by the International Accounting Standards Board that it will also delay the issuance of proposed rules until the summer of 2004. During its September 10 discussion, there was also an indication that a model other then Black-Scholes might emerge as the preferred expensing approach.

IRS Issues Final Rules on Qualified Cost Sharing Arrangements and Equity Compensation

The IRS has issued final regulations (T.D. 9088) governing the allocation of costs in developing intangibles related to stock options and other equity instruments in qualified cost sharing arrangements (QCSAs). QCSAs are procedures to allocate costs between U.S. companies and their controlled non-U.S. partners or subsidiaries. The regulations require that the income from the development of intangibles (such as a patent or a software program) be shared between the companies based on the relative costs each has borne in developing them. The new regulations, which were issued in the face of considerable industry criticism, require that equity pay be considered a cost. Companies can measure the value of the award either based on the intrinsic value of the award at exercise or a present value grant date estimation. Vested, unexercised awards are treated as if exercised at the date the QSCA terminates. If awards are repriced or modified in favor the employee, this can trigger a cost. The formal effective date of the new rules is for tax years beginning after the publication of final rules. In the interim, however, the IRS has indicated that companies should use these rules anyway. A copy of the rules can be found here on the IRS's site.

FASB Delays Implementation Date for FAS 150 for Closely Held Companies

The Financial Accounting Standards Board (FASB) has delayed the date after which closely-held companies must implement new rules for showing a cost for mandatorily redeemable obligations, including equity instruments. As we have discussed in prior issues, it appears that these rules could affect ESOPs where stock from the plan is distributed to employees, who then have a put option for the shares to the company. Originally, the rules were to take effect for fiscal years after December 15, 2003; now that has been put back one year. Many companies (ESOP and otherwise) complained that the new rules could put them into technical bankruptcy or fraudulent conveyance situations. FASB did not indicate, however, that it would consider changing the rules.

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