| vol 2 issue 2 - Q2, 2009 | ||||||||||||||||||||||||||||||
 Articles» The End of FAS 123R» Other Thoughts Regarding Employee Stock Purchase Programs » Canadian Issuers Checklist for IFRS 2 Share Based Payments » A Time for Normal Course Issuer Bids (NCIBs) or Stock Buybacks? Regular Section In this Issue» Financially Stated..................New SEC Regulation to be Announced.................The SEC Hit List » Tapping Resources..............The Changing Face of HR in 2009 » Added Incentive......................What's in Store for 2009 Salaries  |
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Articles |
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The End of FAS 123R The new, all encompassing, source of authoritative GAAP |
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FAS 123R is no longer the standard for Accounting for Stock-Based Compensation. After five years of development, the FASB Accounting Standards Codification™ was up and running last week on July 1, 2009. This new arrangement of nongovernmental US GAAP in a topical structure subsumes all other standards, including those known as FAS, FSP, AICPA, EITF or APB, and becomes a single online source of searchable authoritative GAAP. This streamlining of GAAP reorganizes the principles by grouping all rules into roughly 90 topics, and draws a sharper distinction between authoritative and non-authoritative GAAP. As a result, “instead of GAAP being represented by thousands of different documents, it’s represented by one single authoritative source”, states Ronald P. Guerrette, VP of the Financial Accounting Foundation. The response from industry executives has been fairly positive on the whole, while many of the remaining executives were unaware this change was occurring (a Grant Thornton survey of 530 CFOs and Comptrollers revealed that only 46% were aware of the Codification project). What one must remember is that this restructuring will cause some aggravation and confusion in the initial stages but it is a much needed step in the right direction. What will be the most tiresome is the fact that company executives must now review and reformulate existing internal manuals so that they are concurrent with the code in the new FASB standard. With proper compliance by companies to the new demands of the FASB codification project, comes the hardship of trying to figure out what to do when those “grey areas” crop up. Thus, Steffan Tomlinson (CFO of Aruba Networks) suggests to work alongside experienced auditors, to better prepare you when such ‘grey areas’ surface. Tom Hoey, director of the codification project, promises that nothing about GAAP has fundamentally changed; the only minor difference is in software revenue recognition, which was elevated from non-authoritative to authoritative GAAP but was already an SEC requirement for public companies. FASB’s Accounting Standard Codification™ Structure The Codification was complied from over 20 sources of existing GAAP literature sources, including:
Some topics/subtopics that may be of particular interests to our KnowledgeWorks readers are the following: Compensation Expensing
715 Compensation - Retirement Benefits 718 Compensation - Stock Compensation For a complete list of the previous principles defined by FAS 123r and what their corresponding code is now under the FASB Accounting Standards Codification™, click here to download Solium Capital's PDF guide. You can also subscribe to either a free Basic View or a paid Professional View via the FASB website. Once subscribed, you will have access to the code as well as a number of tutorials. Summary While it may take some time to adjust to the new structure, it is a more efficient system having all authoritative principles being compiled in a single source. It also clearly draws a division between authoritative and non-authoritative GAAP with content within the FAS Codification being authoritative and any other source considered non-authoritative. |
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Other Thoughts Regarding Employee Stock Purchase Programs | |||||||||||||||||||||||||||||
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Jim McBride 
As Canadian and U.S. equity markets pass the twenty-first month anniversary of their 2007 highs, we are seeing a renewed popularity of employee stock purchase plans (ESPPs). There are many factors impacting this, among which is public outcry at outsized option packages awarded to company executives, but the benefits of ESPPs stand on their own and merit another look, especially if your company doesn't have an ESPP in place already, or is considering modifying an ESPP. It has long been accepted that ESPPs are more inclusive than typical stock option programs. In the case of U.S. tax-qualified (under Section 423 of the Internal Revenue Code) ESPPs, the permitted exclusions are narrowly prescribed. Further, management at companies in either Canada or the U.S., when designing ESPPs, are mindful of the requirements to receive plan approval from the board of directors and, as required, company shareholders. In the United States, Section 423 plans potentially provide a significant tax advantage to plan participants, provided that they meet the required holding period, and in Canada share purchase plans can be linked to employee retirement accounts for longer term financial planning. With ESPPs employees opt in, as opposed to option or restricted share programs, where the prerogative is with the company. This allows employees to effectively customize that component of their compensation package, and therefore participating employees are presumably those who most highly value this form of compensation. Because of the purchase frequency, which can often be semi-monthly in case of Canadian plans, ESPPs can provide participants a convenient means of dollar-cost averaging their purchases. Also, unlike option awards, ESPP purchase rights are rarely “underwater”, especially when ESPPs are accompanied by an employer match or purchase price discount. Purchase discounts can often range up to 15% or more for U.S. plans, and for Canadian plans, employer matches of 50% are not uncommon. Note that the “in the money” feature of an ESPP is partially dependent on any lock-up of the shares or in the case of a matching program vesting on employer-purchased shares. Note also that the plan administrator&8217;s/broker&8217;s timetable for placing purchased shares in employee accounts, especially with a volatile stock price, can have an impact on the employee's ability to realize a gain on a share sale immediately following the purchase. In terms of share utilization and accounting expense, ESPPs generally use far fewer shares than do stock option or restricted stock awards, and ESPPs will often have a smaller per share accounting impact than will option or restricted stock awards. Further, ESPPs with a low discount rate and no look back provision may be non-compensatory under “safe harbor” provisions of FAS Codification™. (Note that this “safe harbor” will no longer apply to companies which adopt IFRS 2, under present accounting provisions.) In summary, during this period of uncertain economic times, ESPPs may be part of a strategy of engendering long term employee loyalty and greater productivity when the employees become owners of the corporation, all at a very reasonable cost to the employer and at a 'discounted purchase' price for the investment, offered to the employee. |
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Canadian Issuers Checklist for IFRS 2 Share Based Payments | |||||||||||||||||||||||||||||
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by Kobe Davis 
In Canada, IFRS reporting guidelines will come into effect for fiscal years beginning with Jan 1, 2011 with comparison reporting being required for the previous fiscal year, starting with Jan 1, 2010. Canada will be joining the European Union, Australia and Russia among others in adoption a unified set of accounting guidelines. As of January 2009, the Securities and Exchange Commission proposed voluntary adoption for US issuers between now and year end 2013. This voluntary adoption applies only to small subset of US corporations with mandatory adoption to be phased in, starting in 2014. In effect, US adoption of IFRS accounting guidelines is still some time away. IFRS 2: Share Based Payments is the reporting standard covering the guidelines regarding accounting for stock-based compensation. We have provided a checklist of items below to be cognizant of when reviewing the differences between Canadian GAAP (CICA 3870) and IFRS 2: Share Based Payments. Where appropriate we have also mentioned the corresponding difference to guidelines under US GAAP (FAS ASC) but as IFRS has yet to be ratified in the US, these items are preliminary. IFRS2 Review Checklist: Valuation & Amortization of Awards
IFRS2 makes a case for the use of a Lattice-based model as opposed to the more commonly used Black-Scholes model. Note, a similar case was also made for moving away from the Black-Scholes with the introduction of FAS 123(r) but to date we have seen relatively few companies change their underlying valuation model.
In addition to requiring that heterogeneous populations of employees should be valuated separately, which is already required under Canadian GAAP. IFRS2 requires that each vesting tranche must be accounted for as a separate arrangement with its own unique fair value measurement. In effect, a distinct fair value must be determined for each vesting tranche based on corresponding assumptions.
In keeping with the previous point, IFRS2 requires that each vesting tranche must be amortized separately and in parallel from the grant date. This is synonymous with graded (accelerated) amortization. This is also a departure from both Canadian and US GAAP which allow for recognition of expense using a straight-line method today.
Under Canadian GAAP, compensation cost and associated liability for award to be settled in cash is intrinsic value, and adjustments in the compensation cost and associated liability are recorded in response to fluctuations in stock price. Under IFRS2, (similar to FAS 123r) compensation cost and associated liability for cash-settled transactions is measured at fair value, not intrinsic value. Under both, until liability is settled, it is re-measured with changes in fair value being recorded in profit and loss. Valuation Model Assumptions
While estimates of forfeitures have been required for some time under US GAAP, that estimate has been optional under Canadian GAAP. For vesting conditions based on other than market conditions, IFRS2 requires a company to calculate the expense based on the best available estimate of the number of equity.
Under Canadian GAAP, there were exemptions that private entities could take regarding the estimate of a Volatility Rate. Under IFRS2 there is also an exemption available under but it is much more restrictive.
Under IFRS2, the expected life input to the valuation model requires companies to calculate based on company metrics. This is not necessarily a departure from standards under Canadian or US GAAP but no explicit exception exists for the allowance of a calculated midpoint for smaller issuers as under US GAAP. General
Under IFRS2, the net settled portion of the award would be accounted for as a liability, separately from the equity portion. This is unlike FAS 123R which permits the entire award to be classified as equity as long as net settled withheld amount is not above the minimum withholding rate for the jurisdiction.
As compared to Canadian and US GAAP, IFRS extends the application of accounting for employee share-based payments beyond just employees to include ‘others providing similar services. In effect awards to non-employees will be treated in the same way as awards to regular employees, meaning the revaluation of awards up until vest will no longer be required.
IFRS2 states that equity awards should be treated as an equity-settled share-based award regardless of whether entity decides to or is required to buy the equity instruments from another party to satisfy obligations relating to award. Under Canadian GAAP, no such similar guidance so companies classifying awards as liability may now have to shift these to equity.
Under IFRS2, compensation expense must be recognized as services are received; so under certain circumstances, an entity is required to recognize an expense for a share-based payment in advance of the grant date. Currently Canadian GAAP does not allow for recognition of share-based payments before grant date.
The Deferred Tax Asset is based on intrinsic value and revalued each period under IFRS2. When the tax deduction is less than book value of award, deficiencies go to the P/L statement; there is no concept of APIC pool for shortfalls. This is a departure from US GAAP where the DTA is based on fair value and shortfalls/deductions may be netted to Additional Paid-In-Capital.
Under IFRS2, if the settlement alternative is in the hands of the counterparty, the entity is considered to have issued a compound instrument consisting of a debt and equity component. |
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A Time for Normal Course Issuer Bids (NCIBs) or Stock Buybacks? | |||||||||||||||||||||||||||||
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Jim McBride 
Recently, there have been several announcements in Canada and the U.S. of Normal Course Issuer Bids, or NCIBs, (Canada) or stock buybacks (US). Citations from recent NCIB announcements are as follows.
The last of these reasons is specifically to prevent additional dilution from shares issued as a result of a restricted stock unit award program, but generally, a company is hoping to address a depressed share price by providing price support for the shares. In Canada, for TSX-listed companies, NCIBs are governed by Sections 628, 629 and 629.1 of the TSX Company Manual. Requirements include the following:
Additionally, the TSX imposes limitations as to price, purchase volumes (with block trade exceptions) and timing of purchases. In the U.S., share buybacks are covered by Rule 240.10b-18 : “Purchases of Certain Equity Securities by the Issuer and Others” under the Securities Exchange Act of 1934, which provides an issuer with a “safe harbor” from liability for manipulation under the Act solely by reason of the manner, timing, price, and volume of its repurchases when it repurchase the issuer's common stock in the market in accordance with the section's manner, timing, price, and volume conditions. U.S. issuers must report their purchases on Form 10-K, per instructions in Regulation S-K. In the U.S. such major companies as Alaska Air, ExxonMobil, Microsoft, PetSmart, and WalMart have all announced new buybacks or extensions to buyback programs in the past nine months, and as recently as June 29, PHC, Inc. announced a new share buyback program. NCIBs or share buybacks aren’t for all companies, but for companies with available cash, a divergence between the present depressed share price and underlying company value, and dilution of existing shareholders as a result of employee equity programs, what better time than the present to proceed with a purchase of company shares. |
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Regular Section |
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Financially Stated | |||||||||||||||||||||||||||||
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New SEC Regulation to be Announced President Obama is set to expand the role of the SEC to promote “transparency in disclosures to investors”, as stated in the financial regulator plan released on Wednesday June 17th. This eighty five page white paper identifies the reforms for the financial services industry and includes a broad set of significant changes in a number of areas. The five main components of this reform proposal consist of:
It looks like reform is on the horizon and future financial plans in the U.S. seem to be pointing to increasing the responsibilities of both the Federal Reserve and the SEC.
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Tapping Resources | |||||||||||||||||||||||||||||
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Two US giants in the Human Resources world merge 
Watson Wyatt Worldwide Inc. and Towers Perrin Forster & Crosby Inc. have agreed to a merger of equals in a $3.5 billion stock deal, making them one of the largest HR consulting firms in the world. Through the terms of the deal, current shareholders and designated employees of each firm will receive shares of the newly formed Towers Watson & Co. Together they will employ 14,000 employees and are expected to garner $3 billion in annual revenues. Amongst the benefits of the merger, the firms stated that Towers Watson would be “stronger than the sum of its parts, positioned for industry leadership long into the future and a more effective competitor that can provide additional services to our existing and prospective clients.” However, neither Watson Wyatt nor Towers Perrin is currently a provider of benefits outsourcing, and it is not known at this time whether Towers Watson & Co. will support this service. The transaction is subject to approval by both companies’ shareholders, closing conditions, regulatory reviews and competition reviews but the companies don’t anticipate any problems which would derail or delay this merger. |
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Added Incentive | |||||||||||||||||||||||||||||
The Real Deal on 401(k) Contribution Plans 
The Employee Benefit Research Institute has noted that some plan sponsors who initially were matching their workers contributions have stopped doing so in light of the current economic conditions. Cutting 401(k) contribution matching unfortunately means a greater reduction in retirement money saved for most Americans. In an effort to retain cash on hand, about “one quarter of U.S. employers have eliminated matching contributions to employee 401(k) retirement plans since September” reports CNN. But just how much money are these companies really saving? Hewitt Associates “ran the numbers”, taking for example a company who matches fifty cents for every dollar an employee contributes; CNN reports that, “the cost of savings is about $1500 per worker”. Therefore, it is clear to see that for a large sized company, the savings can be significant. Hewitt Associates approximates that on average about $25 million dollars can be saved if contribution matching is cut. These matching cuts can have spiraling effects. If companies choose to cut 401(k) matching, it causes workers to either reduce the amount they are contributing to their retirement savings plans or, in a worse case scenario, precipitates a halt in contributing altogether. This arrest in contributions by both employer and employee can “deplete retirement savings by hundreds of thousands of dollars” (CNN.com). With special attention to those companies who are quick to slash contribution matching plans, the following are some suggestions by Penelope Wang, senior writer for CNN Money, to help Americans enjoy a better retirement fund, in the event that your contribution matching plan is on the down slope:
With the aforementioned suggestions in mind, Americans of varying salary ranges can all have an opportunity to reap the benefits of decades of hard work once retired. All we need to do is make a few modifications to the current system, which in turn means a bigger nest egg in the future.    |
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Valuation Model
As it stands today, the SEC has “no direct authority” for regulating issuers. Thus it is being suggested that in order to promote transparencies, new legislation must be formulated, further enabling the SEC to “improve the timing and quality of disclosures to investors”. President Obama is suggesting to Congress that the Federal Reserve become a de facto systemic regulator and be responsible for identifying any threats to financial stability, further stating that “The absence of a working regulatory regime over many parts of the financial system, and over the system as a whole, led us to near catastrophe”.
