What You Need to Know About:
Share-Based Compensation

Accounting for share-based compensation to employees has been a subject of great interest to investors, preparers, and other stakeholders. Many public and private businesses supplement cash compensation by awarding to employees shares of the business or the right to buy shares of the business. This type of compensation is commonly referred to as equity compensation or share-based compensation.
Many companies supplement cash compensation by awarding to employees shares of the business or the right to buy shares of the business. This is commonly referred to as equity compensation or share-based compensation.

The FASB is looking for ways to reduce cost and complexity in accounting for share-based payments, while maintaining or improving the quality of information provided to investors and other financial statement users.

Some of the improvements should benefit all companies that have share-based compensation. Some are targeted at private companies. The Private Company Council (PCC) is providing ongoing input and advice to the Board and the staff.

The Board has made tentative decisions to make improvements to simplify the accounting for share-based payment, including:
  • Cash flow presentation
  • Valuation of awards
  • Employee and employer income tax consequences.
The Board also instructed the staff to conduct pre-agenda research on the following ideas from stakeholders:
  • Accounting for share-based payments to non-employees
  • Disclosures
  • Allowing private companies an alternative to recognize all awards as liabilities measured at intrinsic value.
Historical and recent stakeholder feedback has been a vital component of the Board’s deliberations and decision-making process.
The FASB decided to add this topic to the agenda for a number of reasons. We received feedback from the PCC, from stakeholders who submitted ideas for the FASB’s Simplification Initiative, and the Post Implementation Review (PIR) team’s report on the topic.

The FASB first issued comprehensive guidance in the areas of share-based compensation in 1995. FASB Statement No. 123, Accounting for Stock-Based Compensation, established the fair-value-based method of accounting for employee equity compensation in which that compensation would be recognized in earnings. While the standard encouraged such recognition, it was at the time not required.

Prior to 2002, very few companies chose to adopt the fair-value-based method set forth in Statement 123. The serious financial reporting failures that came to light beginning in 2001 led to increased interest in accounting and financial reporting issues.

Financial statement users said that the failure to recognize compensation cost for most employee share options had obscured important aspects of reported performance and impaired the transparency of financial statements. A number of organizations began to respond to this demand for transparent financial reporting by electing to recognize equity compensation cost in earnings using the fair-value-based method in Statement 123.

The FASB also responded by updating its existing guidance in 2004 to require—not encourage—companies to use a fair-value-based method to determine the amount of equity based compensation paid to employees and to report that compensation as an expense.

The Board currently is deliberating improvements, and it plans to expose an initial document for public comment in mid-2015.
In 2014, the FAF’s Post Implementation Review team completed a review of Statement 123(R), Share-Based Payment, and concluded that Statement 123(R) achieved its expected benefit. The report identified many positive aspects of the share-based payment standard, including its usefulness to investors.

The PIR report also showed that some private company stakeholders thought that the standard was sometimes difficult to understand and costly to apply. The feedback was consistent with input the FASB recently received from stakeholders through outreach for the FASB’s Simplification Initiative and for research for the PCC.

Historical and recent stakeholder feedback has been a vital component of the Board’s deliberations and decision-making process. The Board currently is deliberating improvements, and it plans to expose an initial document for public comment in mid-2015. More information on the project can be found here.