FASB 123 (R), Shared-Based Payment replaces FASB 123, Accounting for Stock-Based Compensation. It also supercedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. FASB 123 (R) requires that compensation cost relating to share-based payment transaction (share options, restricted share plans, performance based awards, stock appreciation rights or SARs and employee stock purchase plans) be recognized in the company’s financial statements. The cost measurement is based on the fair value of the equity (shares of stock) or liability (cash) instruments issued.
FASB 123 (R) affects employers, employees and shareholders. Employers are required to make certain disclosures regarding their share-based payments. These disclosures include the following:
• The nature and tem of the share-based payment arrangements and the potential effect on shareholders.
• The effect of compensation costs from share-based payment arrangements on the company’s income statement.
• The method used by the company to estimate the fair value of the instruments issued.
• The cash flow effect resulting from the share-based payment arrangements.
These disclosures were not required in previous statements.
Employees are affected as companies make changes to existing arrangements. Many companies are reducing the use of stock options, “given that the accounting treatment for stock options in no longer as favorable as before”. (Kieso, p. 807) Instead, they are offering restricted shares. The offering of restricted shares holds several advantages over options. “Major advantages of rest ...