EXECUTIVE SUMMARY

Implementation of FASB Statement no. 123(R) goes beyond selecting a method to value employee stock options. CPAs also must help companies make the necessary tax accounting adjustments to properly track the tax benefits from stock-based compensation.

Statement no. 123(R) requires companies to use deferred tax accounting for employee stock options. An option’s tax attributes determine whether a deductible temporary difference arises when the company recognizes the option-related compensation expense on its financial statements. Companies will treat nonqualified and incentive options differently.

Companies that did not follow the fair value approach of Statement no. 123 must establish an opening pool of excess tax benefits for all awards granted after December 15, 1994, “as if” the company had been accounting for stock options under this statement all along. To do this CPAs must do a grant-by-grant analysis of the tax effects of options granted, modified, settled, forfeited or exercised after the effective date of Statement no. 123.

Certain unusual situations may require special handling. These include cases in which employees forfeit an option before it is vested, the company cancels an option after vesting or an option expires unexercised, typically because it is underwater. CPAs also need to be cautious of possible pitfalls when options are underwater, when the company operates in other countries with different tax laws or has a net operating loss.

Calculating the beginning APIC pool and the ongoing tax computations required by Statement no. 123(R) is a complex process requiring careful recordkeeping. The newly approved simplified method adds yet another set of computations companies need to perform. CPAs should encourage companies to begin making these calculations as soon as possible as some require tracking down historical information.

Nancy Nichols, CPA, PhD, is associate professor of accounting at James Madison University in Harrisonburg, Va. Her e-mail address is nicholnb@jmu.edu . Luis Betancourt, CPA, PhD, is assistant professor of accounting at James Madison University. His e-mail address is betanclx@jmu.edu .

ou’ve made the necessary valuation methodology decision and helped the company select an adoption method. Now it’s time to sit back and relax while other companies struggle to finish implementing FASB Statement no. 123 (revised), Share-Based Payment. But wait…. Before you get too comfortable, there are other concerns companies that issue stock-based compensation must deal with. While valuation issues have received the lion’s share of the attention, CPAs also must help unwary companies cope with Statement no. 123(R)’s tax implications.