The formal accounting name FAS 123R is the Financial Accounting Standards Board statement on share-based compensation and more specifically addresses the expensing of stock options. The FAS 123R rules as it relates to options is often misunderstood, but if attention is focused on the key areas, accounting for stock options becomes much more straightforward.
- It is very important that before being able to accurately and efficiently account for stock options that the responsible parties clearly understand how these vehicles are evaluated. The company board members or whomever is responsible for the granting of stock options should have a deep understanding of the key option evaluating factors like time to maturity, volatility of the underlying stock, vesting period, forfeiture rates and blackout periods.
- The FAS 123R only requires that the option valuation is accounted for at grant date versus when the performance or service-based criteria have been met. This means that regardless if the option grant was tied to performance or service, the options are valued and expensed based on the grant date.
- See if any of the stock options you have granted that are far out-of-the-money can have their vesting accelerated to prevent having to incur a future compensation expense associated with these options. Before FAS 123R, this was not the case.
- One of the biggest changes with FAS 123R is where windfall tax benefits will be recorded. With FAS 123R, a windfall tax benefit is created if the deduction for tax purposes exceeds the option compensation cost recognized in the income statement.
- Stock options under FAS 123R requires that the companies maintain income tax data by award, option holder, country, and vesting to allow for the appropriate accounting entries can be recorded. This an important tip because usually most stop option accounting systems do not maintain this data.
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