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123R ("FAS 123R"), the Financial Accounting Standards Board ("FASB") and at least one member of the "Big 4" accounting firms have signaled that this historical approach will not pass muster under FAS 123R.In response to a recent inquiry, FASB representatives clarified their interpretation of a key aspect of FAS 123Rs fair value determination: what is the "date of grant" for an equity instrument?Related to these issues, without careful calibration of the communications process, fluctuations in share price can result in either discount or premium awards.Employees typically do not favor awards granted at a premium, and awards issued at a discount can violate both the terms of an equity compensation plan and Section 422 of the Internal Revenue Code of 1986, as amended ("Code"), which for incentive stock options requires an exercise price of no less than 100% of the market value on the "date of grant." In addition, discounted options are likely to violate the limitations on deferred compensation arrangements imposed by Section 409A of the Code (subjecting the optionee to an additional 20% penalty tax). 25 ("APB 25"), companies have historically considered the effective date for grants of "equity instruments" (e.g., stock options, restricted stock, etc.) to be the date on which those awards are approved by the board of directors.This has been the case even where the fact of an award or its specific terms might not be communicated to grantees for some period of time following the approval.If you have any questions regarding your proposed option grant, please contact ________.
This is frequently the approach taken for offer letters provided to prospective new hires.
For example, where prospective optionees receive an initial notice, they may develop an expectation about the their awards that the board feels constrained to honor, implicitly limiting its discretion.
If the board does not approve awards that match expectations, employee morale may suffer.
At a minimum, companies should consult with their own accountants to determine how they propose to address FASBs approach.
Although there have been calls for the SEC to intervene to moderate FASBs position (as it did with Staff Accounting Bulletin 107 earlier this year eliminating FASBs proposal to apply FAS 123R in the middle of the year for calendar year public companies), unless and until that occurs, FASBs interpretation will remain effective, and companies should be prepared to comply with it as they become subject to FAS 123R.