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Society Gives FASB Input on Financial Instruments and Other Plans

Chris Gaetano
Published Date:
Feb 16, 2014
The NYSSCPA weighed in on several proposals from the Financial Accounting Standards Board (FASB) as part of a recent spate of comment letters. In a letter released on Dec. 19, the Society responded to the FASB proposal, “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements,” a measure aimed at reducing the cost and complexity of incremental reporting for development-stage entities, or entities that devote substantially all of their efforts to establishing a new business, and for which planned principal operations have not commenced or have not generated significant revenue. The proposal would strike the definition of this type of entity from the literature entirely, making it no different from any other reporting entity, as well as all differential reporting requirements.

The NYSSCPA, however, felt that the FASB should keep the definition and some, though not all, of the differential reporting requirements. These entities, it said, should still be required to describe the nature of their activities and disclose that they had been in the development stages in prior years during the first fiscal year where it is no longer so. It did agree, however, with the proposed elimination of cumulative information currently presented in development-stage entities’ financial statements.

The Society also responded to a FASB proposal originating from the board’s Emerging Issues Task Force, regarding the nature of hybrid financial instruments. On Dec. 19, the NYSSCPA released a comment letter written in response to an Oct. 23 proposal entitled, “Proposed Accounting Standards Update—Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.” The proposal would have entities, when making an evaluation of whether a hybrid instrument is debt or equity, consider all stated and implied substantive terms and features of that instrument, weighing all relevant facts and circumstances. However, the standard itself would require the use of professional judgment when making the final determination as to the nature of the instrument, with the economic characteristics and risks taken as a whole, and the existence or omission of any single term or feature not necessarily being the final word in this evaluation.

The Society largely agreed with the proposal, though it expressed some concern that it could represent a burden to smaller entities and trigger restatements of previously issued financial results, as the standard would require the use of a modified retrospective basis. Because of this, the Society recommended that it be permitted, but not required, to use this retrospective basis.

Finally, the Society gave its input on a FASB proposal regarding accounting for share-based payments. On Dec. 19, it released a comment letter, written in response to the FASB proposal “Proposed Accounting Standards Update—Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period,” which also came from the board’s Emerging Issues Task Force. The proposal is intended to provide a framework to account for share-based compensation linked to a reward target that can be completed after a requisite service period, something that U.S. Generally Accepted Accounting Principles currently does not have.

In general, the FASB proposal would require that a performance target that could be achieved after the requisite service period be treated as a performance condition that affects the vesting of the award. In other words, compensation cost would be recognized if it is probable that the performance condition would be achieved, with the total amount of compensation reflecting the number of awards that are expected to vest, with a later adjustment to reflect the ones that ultimately do vest.

The Society largely agreed with the proposal, noting that the treatment would simplify valuation and that separate calculations would not need to be done for those employees retiring prior to the estimated performance target date. By using the performance target as a performance condition, the Society said, compensation cost would not be recognized for performance targets that may have a “more likely than not” expectation of achievement, thereby reporting more accurate financial results. 

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