August 9, 2005
The FASB Speaks: Confirming the Worst on Option Expensing
Following up on a coupla of recent blogs, Mike Melbinger blogged yesterday on CompensationStandards.com as follows: Confirming our worst fears, we are told that during a Friday conference call with the Big 4 accounting firms, the FASB confirmed its view that companies cannot fix the equity grant date at which expensing would begin until the material terms of the award have been communicated to employees.
This dramatic reversal of the accounting rules under APB 25, FAS 123 (and common sense), seemingly made wholly outside the regular review and comment process, means that companies will have to completely revise the way they have made equity awards for the last 50 years or risk negative accounting and tax consequences.
Inasmuch as the exercise price for a stock option (and expense date for other awards) will need to be set as of the date the material terms of the award are communicated to optionee, at this point according to Mike, companies would seem to have a few choices:
1. Prepare option award agreements in advance so that they may be sent to optionees on the same date as approved by the Board (or Compensation Committee), or
2. Have the Board resolution specify an option award date sufficiently in the future to give the plan administrator time to prepare and send the award agreements, with the exercise price for the option award determined only on that future date.
On the NASPP’s site, there is more info on this issue, including this Q&A. More to come on this…
SEC Staff to Issue Transitional Guidance on ’33 Act Reform
Yesterday at the ABA’s Annual Meeting, Corp Fin Director Alan Beller noted that the Staff was putting together transition guidance regarding ’33 Act reform. A number of transition issues remain open, such as how to deal with open shelfs. No timetable was given for the upcoming guidance, but it likely will be well before the December 1st effective date.
If you don’t work with utility holding companies, you might not be aware of PUHCA (pronounced “puke-ah”) – this odd moniker relates to legislation enacted in 1935 that regulates holding companies for utilities and was controversial from day one. A small group of folks in the SEC’s Division of Investment Management work primarily on PUHCA issues.
Yesterday, PUHCA was repealed as part of President Bush signing the new energy bill – and replaced with a less onerous Public Utility Holding Company Act of 2005. Learn more in this memo from McGuire Woods.