Summary of Statement No. 148

Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123 (Issued 12/02)


This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

Reasons for Issuing This Statement

Statement 123 required prospective application of the fair value recognition provisions to new awards granted after the beginning of the period of adoption. When Statement 123 was issued in 1995, the Board recognized the potential for misleading implications caused by the “ramp-up” effect on reported compensation cost from prospective application of the fair value based method of accounting for stock-based employee compensation to only new grants after the date of adoption. However, the Board was concerned that retroactive application would be excessively burdensome to financial statement preparers because the historical assumptions required to determine the fair value of awards of stock-based compensation for periods prior to the issuance of Statement 123 were not readily available. Because Statement 123 requires disclosure of the pro forma effect of applying the fair value based method of accounting for those entities that continue to use the intrinsic value method of accounting, historical information about the fair value of awards granted since the original effective date of Statement 123 is readily available.

A number of companies have recently adopted or announced their intention to adopt the fair value based method of accounting for stock-based employee compensation. To respond to concerns raised by constituents, including financial statement preparers’ concerns about the ramp-up effect arising from the transition method prescribed by Statement 123 and financial statement users’ concerns about the lack of consistency and comparability in reported results caused by that transition method, this Statement requires new disclosures about the effect of stock-based employee compensation on reported results. This Statement also requires that those effects be disclosed more prominently by specifying the form, content, and location of those disclosures.

How the Changes in This Statement Improve Financial Reporting

This Statement permits two additional transition methods for entities that adopt the preferable method of accounting for stock-based employee compensation. Both of those methods avoid the ramp-up effect arising from prospective application of the fair value based method. In addition, to address concerns raised by some constituents about the lack of comparability caused by multiple transition methods, this Statement does not permit the use of the original Statement 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003.

Also, in the absence of a single accounting method for stock-based employee compensation, this Statement requires disclosure of comparable information for all companies regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting. This Statement improves the prominence and clarity of the pro forma disclosures required by Statement 123 by prescribing a specific tabular format and by requiring disclosure in the “Summary of Significant Accounting Policies” or its equivalent. In addition, this Statement improves the timeliness of those disclosures by requiring their inclusion in financial reports for interim periods.

International Convergence

The Board did not reconsider the recognition and measurement provisions of Statement 123 in this Statement because of the ongoing International Accounting Standards Board (IASB) project on share-based payment. The IASB concluded its deliberations on the accounting for share-based payments, including employee stock options, and issued an exposure draft for public comment in November 2002. That proposal would require companies using IASB standards to recognize as an expense, starting in 2004, the fair value of employee stock options granted. While there are some important differences between the recognition and measurement provisions in the IASB proposal and those contained in Statement 123, the basic approach is the same-fair value measurement of stock-based employee compensation at the date of grant with expense recognition over the vesting period.

The Board has been actively working with the IASB and other major national standard setters to bring about convergence of accounting standards across the major world capital markets. In particular, the Board and the FASB staff have been monitoring the IASB’s deliberations on share-based payments and, in November 2002, issued an Invitation to Comment summarizing the IASB’s proposal and explaining the key similarities of and differences between its provisions and current U.S. accounting standards. In the near future, the Board plans to consider whether it should propose changes to the U.S. standards on accounting for stock-based compensation.