If the plan is compensatory, when is compensation measured?

For plans classified as equity, compensation is measured at the grant date. This is true even if the plans have cashless exercise features or performance conditions that would have required "variable accounting" under Opinion 25.

For plans classified as liabilities, compensation is measured at grant date and then re-measured every reporting period until final settlement (akin to "variable accounting").

The definition of grant date in Statement 123(R) carries forward from Statement 123 the concept of "mutual understanding" by employer and employees of key terms and conditions. Under Statement 123, practice treated the grant date of an award as generally the date the award is approved in accordance with a company's corporate governance provisions, so long as the approved grant is communicated to employees within a relatively short time period from the date of approval. For many companies, the number and geographic dispersion of employees receiving share-based payment awards means that it is impossible to communicate with each employee immediately after the awards are approved by the board of directors (or management with the relevant authority).

Last summer, some accountants concluded that the term mutual understanding should be read literally and that the grant date would be the date that the terms were communicated to each individual employee. This would have been quite cumbersome for companies with many grants, because it would have resulted in multiple grant dates, with different fair values, for each group of awards. That conclusion caused consternation among employers and compensation consultants. In response, the FASB issued FSP FAS 123(R) - 2, "Practical Accommodation to the Application of Grant Date as Defined in FAS 123(R)" affirming prior practice under Statement 123. As such, the FSP clarifies that a mutual understanding of the key terms and conditions of an award to an employee should be presumed to exist at the approval date of the award if both of the following conditions are met:

1. The award is a unilateral grant (i.e., the employee may not negotiate terms and conditions with the employer), and
2. Key terms and conditions are expected to be communicated within a reasonable period from date of approval.

The guidance in this FSP is to be applied upon initial adoption of Statement 123(R).

How Statement 123(R) differs from Opinion 25
Under Opinion 25, compensation for some plans is measured at grant date and compensation for other plans is measured at a later date, typically either vesting date or exercise or settlement date, with compensation estimated at each reporting date. However, the dividing line in Opinion 25 relates to when the amount the employee must pay and the number of shares the employee is entitled to are known. If both factors are known at grant date, and vesting is not dependent on anything other than continued employment, compensation is measured at the grant date. Absent these conditions, compensation is measured at a later date when these factors become known, with interim estimates beginning at grant date. If the number of shares is not known solely because of uncertainty about whether the employee will render service for a stated period, the factors are known at grant date. If any other uncertainty exists about the number of shares, final measurement of compensation is delayed until that uncertainty is resolved. Situations involving delayed measurement often are referred to as "variable accounting," because the amount of compensation expense varies from period to period as the price of the company's shares changes.

How Statement 123(R) differs from Statement 123
Statement 123 is similar to Statement 123(R), in that compensation for equity interests is measured at grant date and compensation for liabilities is measured at exercise or settlement date with interim estimates.

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