What is the scope of Statement 123(R)?
What plans does it cover?
Statement 123(R) covers plans for employees that convey shares of the employer's stock, derivatives (such as options) related to the employer's shares, or cash in amounts tied to the value of the employer's shares. Employee is defined the same as in FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation: an interpretation of APB Opinion No. 25, as a person over whom the grantor exercises or has the right to exercise sufficient control to establish an employer-employee relationship. A grantee meets the definition of an employee if the grantor consistently represents that individual to be an employee under common law. In the U.S., this means that the grantee must be an employee for U.S. payroll tax purposes and an employee of the grantor under common law. In addition, certain leased employees qualify as employees, consistent with Interpretation 44. Finally, also consistent with Interpretation 44, awards to nonemployee members of the board of directors in their capacity as directors are covered in the scope.
In general, the accounting for grants to nonemployees (including independent contractors, consultants and external service providers, as well as to employees of joint ventures and equity method investees) will continue to be governed by the consensus in Emerging Issues Task Force (EITF) Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." The FASB potentially will deal with nonemployees, as well as Employee Stock Ownership Plans (ESOPs), in a subsequent phase of the share-based payment project. The consensus in EITF 96-18 differs in some respects from the accounting required in Statement 123(R), most notably the date on which compensation is measured. Consequently, Statement 123(R) contains complex guidance for measuring compensation when an individual changes status from employee to nonemployee, or vice versa. This will continue to be burdensome for employers whose employees frequently change status for accounting purposes, for example, employers who regularly transfer employees to and from corporate joint ventures.
EITF 96-18 states that share-based payment awards to nonemployees should be measured based on the fair value of the services received or the fair value of the award, whichever can be estimated more reliably. If the fair value of the award can be estimated more reliably, which is ordinarily the case for a registrant, then EITF 96-18 is the appropriate guidance and would take precedence over Statement 123(R)'s guidance about when to measure fair value. However, EITF 96-18 does not provide guidance on some classification and measurement issues. SAB 107 suggests that the guidance in Statement 123(R) should be followed if there is no conflicting guidance in the EITF consensus. Most significantly, and in a change from prior SEC guidance, if nonemployee options have limits on transferability or hedgeability like employee options do, it would be appropriate to use an estimated term rather than the full contractual term. Otherwise, the use of an expected term which is shorter than the contractual term would generally not be appropriate in estimating the fair value of the nonemployee options. Awards to individuals may have characteristics like employee awards, whereas awards to companies typically do not. See further discussion below regarding measurement and estimation of expected term of options.
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