April 2016

ASU 2016-09 - Share-Based Accounting
Photo by David Fulmer

Over the past couple of months, the FASB has been busy. I wanted to point out one recent change and my thoughts on its impact.

FASB has “simplified” share-based compensation accounting. I will always have a special place in my heart for old FAS123 since it was on my CPA exam a couple of decades ago.  Nevertheless, much has changed since then (APB No. 25 anyone?), including most recently:

  • No more APIC pools. Currently, tax benefits in excess of compensation cost are recorded in equity (specifically, Additional Paid In Capital or APIC). The accumulation of excess benefits has been known as an APIC pool. Tax deficiencies decrease the APIC pool. Under the new accounting rules, excess benefits and deficiencies are recognized in the period in which they occur.

My Take – Expect more income tax expense volatility from period to period. If the changes impact tax expense significantly, we could see more non-GAAP financial measures develop. Just be careful of the renewed focus on non-GAAP financial measures from the SEC.

  • No longer need to estimate forfeitures. GAAP currently requires you to estimate the number of awards that will be forfeited to calculate a more accurate amount of compensation cost each period. Under the new rules, you can continue to estimate or you can just reverse the compensation previously expensed when the forfeiture occurs. If you choose the new route, then you will have to hit retained earnings for the cumulative-effect adjustment incurred as a result of the change as of the beginning of the year the change is applied.

My Take – Again, there could be potentially more volatility if you elect to apply the new “actual” forfeiture approach.   A good example of volatility would be if a company had a significant layoff of employees. The increase in forfeitures during the layoff period would significantly Continue Reading Impact of accounting literature: Time to get out of the pool and other changes

On April 13, the SEC authorized the issuance of a major concept release. Concept releases are trial balloons that the SEC publishes to elicit input on possible rulemaking, including whether rulemaking is needed and what form it should take if it happens. The April 13 concept release is entitled “Business and Financial Disclosure Required by Regulation S-K”. Given that Regulation S-K spells out many of the disclosure requirements applicable to all sorts of Exchange Act filings, it’s bound to be significant.

The concept release is a very large trial balloon indeed – it runs to nearly 350 pages – and I have yet to crack it open. However, I do intend to read it. And I urge you to do the same, as it’s likely to impact disclosure requirements for the next generation.

Some preliminary thoughts about the concept release, based upon press reports and the opening statements made by the Commissioners during the meeting at which the release was approved for publication: Continue Reading Another SEC concept release

One of the hottest topics in governance today is director refreshment. (No, that doesn’t refer to what your board members have for lunch.)  Boards comprised of long-serving directors do, in fact, tend to be “pale, male and stale” – i.e., comprised of old white men. Self-perpetuating boards are less likely to be diverse, and there is increasing evidence that companies with diverse boards tend to perform better (the evidence demonstrates correlation rather than causation, but it’s still evidence). There is also a plausible argument that self-perpetuating boards are less likely to challenge long-standing assumptions and practices, leading to board (and corporate) stagnation.

Perhaps it’s a poorly kept secret, but companies and boards have been concerned about this for years if not decades. Even boards that don’t engage in much introspection are often aware that some directors do not contribute much. As a result, companies and boards have tried all sorts of devices to force board refreshment – term limits and/or age limits having been the most common. Unfortunately, these devices have not worked very well, perhaps because they may be inherently ineffective, and no doubt also because companies often move the goalposts – age limits are waived (because keeping director X is deemed to be “in the best interests of the company”, whatever that means) or creep upward, term limits force good directors to retire, etc. And so, corporate America continues to search for the right approach. Some companies have adopted extremely long term limits (15 years), and others have said that average tenure may not exceed X years, but it’s too soon to tell whether these or other newer approaches will succeed.

Continue Reading Governance by the numbers