Corporate Securities Law Blog

On September 16, FASB released a proposed Staff Position that would provide relief to companies on the application of "grant date" as defined in FAS 123(R). The grant date is the date as of which compensation cost for a stock option or other equity compensation is measured. The proposed FSP would reverse the FASB staff's view that the grant date does not occur until the material terms of an equity grant are actually communicated to the employee. As many are aware, that view was a dramatic departure from historical accounting practices and would mean an added administrative burden for most companies. Under the proposed FSP, however, companies can continue to treat the plan administrator's approval date as an award's grant date if both of the following conditions are met:

• The employee does not have the ability to negotiate the key terms and conditions of the award.
• The key terms of the award are expected to be communicated to all recipients within a relatively short time period following approval by the plan administrator.

"Key terms and conditions" are not defined, but for stock options almost certainly would include such items as the number of shares granted, the exercise price, the vesting period and conditions, and the term of the option. "A relatively short time period" is defined by the proposed FSP as "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 resources practices."

Comments on the proposed FSP may be submitted to the FASB until October 1, 2005. For companies already subject to FAS 123(R), the final FSP will take effect when it is posted to the FASB website. The final FSP will apply to all other companies when they first become subject to FAS 123(R).

Companies should consult with their own accountants regarding how to address FASB's approach to equity grant dates. Companies should also be aware of when they first become subject to the new rules of FAS 123(R):

• For public companies that do not file as small business issuers—as of the beginning of the first fiscal year that begins after June 15, 2005.
• For public companies that file as small business issuers and for nonpublic entities—as of the beginning of the first fiscal year that begins after December 15, 2005.

Written by: David Paik and Michael Gerald