United States: FASB proposes to reverse its position on grant date determination

As reported in a previous Cooley Alert, FAS 123(R), which requires that the compensation charge for most equity-based awards be measured on the "grant date" of that award, states that a "grant date" occurs when there is a "mutual understanding" of the key terms and conditions of stock awards. The Financial Accounting Standards Board (FASB) initially took the position that a mutual understanding could not occur until an award’s key terms and conditions were communicated to the employee receiving the award.

In an apparent response to comments and reactions from the business community, the FASB recognized that, "[f]or many preparers, the number and geographic dispersion of employees receiving share-based payment awards limit the ability to communicate with each employee immediately after the awards have been approved by the board of directors (or its equivalent)" and is now seeking to offer a "practical solution."

On September 16, 2005 the FASB staff released its Proposed FASB Staff Position (FAS 123(R)-b, Practical Exception to the Application of Grant Date as Defined in FASB Statement No. 123(R),¹ which reverses the staff’s prior position with respect to determining the "grant date" of a share-based payment and provides that the date of the relevant corporate action (board, committee or management with the relevant authority) will establish the "grant date" provided that:

• the recipient does not have the ability to negotiate the key terms and conditions of the award with the employer;² and

• the key terms and conditions of the award are expected to be communicated to all recipients within a relatively short period from the date of approval.

The FASB Staff Position provides that "[a] relatively short time period is that period an entity could plausibly complete all actions necessary to communicate the awards to the recipients in accordance with the entity’s customary human resource practices." Thus, a "relatively short period" would likely differ from one employer to the next and would depend on the number and geographic dispersion of the employees receiving the awards. While the Staff Position notes that the use of technology can increase the speed of communication, it also recognizes that human resource considerations may call for personalized communications (which, presumably, are somewhat more time consuming). Because a "relatively short period of time" still may be shorter than the time many companies in the past have taken to communicate equity awards, companies should continue to focus efforts on their grant communication and human resource practices so that share-based payments are effectively and timely communicated to employees.

The Proposed FASB Staff Position contains a comment deadline of October 1, 2005, and will be applied upon a company’s initial adoption of FAS 123(R) (or, for entities that previously adopted FAS 123(R), in the first reporting period beginning after the date the final FASB Staff Position is posted to the FASB website).

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