FASB provides relief on grant date requirements for stock options

November 9, 2005 — 2,027 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

On October 18, 2005, the FASB issued FASB Staff Position (FSP) FAS 123(R)-2, “Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R).” The FSP addresses how a company should determine the grant date for valuing stock options and other stock-based compensation granted to employees.


Statement 123(R), Share-Based Payment, is the new accounting rule for stock options and other stock-based payments to employees. It requires that the amount of compensation cost that a company will record for an award classified as equity is the award’s fair value, measured at its grant date. Statement 123(R) has a number of requirements that must be met for a grant date to occur. One of the requirements is that the employee and employer must have a mutual understanding of the key terms and conditions of the award.

Many companies had taken the position that the grant date occurred when an option was approved, provided that its terms were communicated to employees shortly afterwards. However, the FASB staff had informally indicated that the grant date could not occur before the communication to the employee.

This has become an important issue for a number of reasons. First, any increase in a company’s stock price between the date the award was approved and when an employee was told of the award would cause an increase in the award’s fair value, increasing compensation cost. Also, companies were concerned about tracking the communication date, especially those that had a policy of orally communicating awards to their employees. Difficulties could result in having different award fair values for awards approved at the same time, but communicated on different dates.

FASB Staff Position

FSP FAS 123(R)-2 provides a practical accommodation in determining the grant date of an employee award subject to Statement 123(R). As provided in the FSP, the grant date is the date an award is approved in accordance with a company’s specific corporate governance requirements (for example, by the Board of Directors or management with the relevant authority), provided:

• all other criteria required by Statement 123(R) for a grant date to occur have been met

• the employee cannot negotiate the key terms and conditions of the award with the employer following approval

• the award’s key terms and conditions are expected to be communicated to the employee within a relatively short time period after the approval date.

Effective Date and Transition

The FSP is effective upon a company’s initial adoption of Statement 123(R). If a company had adopted Statement 123(R) prior to the issuance of the FSP, it would apply the FSP in the first reporting period beginning after October 18, 2005, for financial statements or interim reports that have not been issued.

Take Note!

The FSP does not provide a set time period as to what constitutes a relatively short time period. The guidance given is that it is the period in which a company could reasonably communicate the awards to its employees in accordance with the entity’s customary human resource practices.

The Board of Directors of some companies approves only the total of the awards to be granted to employees. Management then determines the actual award granted to each individual employee. In these situations, the grant date cannot occur prior to management’s approval of the awards to the individual employees.

© 2005 Grant Thornton LLP, U.S. Member of Grant Thornton International. www.grantthornton.com. All rights reserved. This Grant Thornton LLP Accounting Alert provides information on a recent accounting development. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or tax advice. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at accounting that complies with matters addressed in this Alert. For additional information on the topic covered in this Alert, contact Grant Thornton LLP.

Grant Thornton LLP