Implementing 123(R), uncertain tax positions and GAAP hierarchy.

• Author: Heffes, Ellen M.
• Position: Financial Reporting Select Issues Update - Generally Accepted Accounting Principles

Implementation issues associated with FASB Statement No. 123(R), Share-Based Payment, is among the top matters on the financial reporting agenda for many companies. And, while that is quite significant, other issues on the standard-setting horizon can potentially affect financial reporting in the foreseeable future. Two of these projects nearing completion are the Financial Accounting Standards Board's (FASB) Proposed Interpretation, Accounting for Uncertain Tax Positions and Proposed Statement, The Hierarchy of Generally Accepted Accounting Principles.

Implementing Statement 123(R) Issues Companies have been required to provide information on a fair-value-based approach about their share-based payment arrangements since 1995. With the impending requirement to include this information in the financial statements, coupled with the changes made by FASB in adopting Statement 123(R), many implementation issues have arisen as companies prepare for its adoption.

Calendar-year Securities and Exchange Commission (SEC) registrants are not required to adopt the standard until Jan. 1, 2006. Those companies must begin to consider the implications of the statement on their financial reporting processes for many reasons, including, but not limited to: 1) "SAB 74" disclosure requirements; 2) internal control over financial reporting/Section 404 reporting requirements; and 3) the effect on future financial statements from awards granted prior to adoption of Statement 123(R).

Preparers and others have also identified a number of implementation issues associated with adoption. Among the more significant are:

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Determining the grant date: Some companies may need to consider making revisions to their grant process to provide for more timely notification of the terms and conditions of the awards to their employees;

Determining the pool of additional paid-in capital available to absorb tax "shortfalls" from option exercises: Because Statement 123(R) requires companies to use "excess tax benefits" from awards granted pursuant to Statement No. 123, Accounting for Stock-Based Compensation, (awards issued in periods beginning after Dec. 15, 1994), companies need to determine the available pool of excess tax benefits available for offset for any award exercises where the amount of the tax deduction is less than the compensation cost recognized for financial reporting purposes;

Estimation of forfeitures: Unlike Statement 123, which permitted...