Financial Reporting Financial Reporting
  March 2006   

 Issues Covered



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How are restrictions on shares or options considered?

A key concept in Statement 123(R) is that restrictions on shares or options prior to vesting are ignored in estimating fair value, while restrictions on shares or options after vesting are contemplated in estimating fair value. Like Statement 123, Statement 123(R) is based on a modified grant date model in which zero compensation is recorded for options or shares that an employee forfeits through failure to meet service (employment) or performance (either individual or company performance targets) conditions. Accordingly, restrictions on shares or options during the period before vesting are ignored in estimating fair value, because it would be double counting to reduce the fair value for such restrictions and also to reverse compensation for forfeited awards. Restrictions after vesting, (e.g., a requirement for an employee to hold the shares for a specified period) would be considered in estimating fair value.

Practical note: For options that are fully vested at the grant date, the effects of nonhedgeability and nontransferability would be taken into account in estimating the fair value of the awards via the estimate of an employee's expected exercise and post-vesting employment termination behavior (see discussion of expected term above). Reload features (those that provide for automatic grants of additional options whenever an employee exercises previously granted options using shares rather than cash)4 and clawback features (e.g., noncompete clause that requires transfer of earned awards back to the issuing entity upon violation)5 should not be reflected in the grant-date fair value of an equity award. These would be accounted for if and when the reload grant or clawback occurs.

4 Refer to Appendix E and paragraph A5 of Statement 123(R) for the definition and accounting, respectively, for reload features.

5 Refer to footnote 44 and paragraph A5 of Statement 123(R) for a discussion of clawback features.

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Copyright © 2006, BDO USA,LLP. Material discussed in this Financial Reporting newsletter is meant to provide general information and should not be acted upon without first obtaining professional advice appropriately tailored to your individual facts and circumstances.