A Review of ASU 2014–12

By: Art Winstead

It’s all about the timing. ASU 2014–12 was issued to provide explicit guidance as to the timing, due to vesting or not, for the recognition compensation of stock-based payments when related to the achievability of future performance, targets, outcomes, etc. There is a little more to 2014–12 than that.

Effective for annual and interim periods beginning after December 15, 2015, all entities will have to apply the guidance in ASU 2014–12, for the accounting for share-based payments when the terms of an award provide a performance target could be achieved after the requisite service period. This ASU is applicable to the guidance in Topic 718—Compensation—Stock Compensation. There is prospective application for granted or modified after the effective periods or retrospectively to all awards with performance targets outstanding as of the beginning of the earliest period presented and all new awards or modified awards thereafter.

Due to the diversities in practice of how entities account for share-based payments, FASB issued this ASU. In most stock awards with a performance target, an employee is required to render service until the performance target is achieved. There are situations in which stock awards are granted and the performance target could be achieved after the required service period. Some entities account for these types of awards as performance conditions that affect vesting and do not reflect the performance target in the estimate as of the grant date for the value of the award. Other entities account for these award targets as non-vesting and affect the grant date value of the award.

In my thinking of those two methods, they both seem to have consistent application of timing and related recognition for accounting.

In an effort to do away with this diversity in practice, this ASU provides explicit guidance for the accounting of these types of awards. ASU 2014–12 requires that a performance target that affects vesting and could be achieved after the required service period be treated as performance condition. For these types of awards, current guidance in ASC 718 should be applied for performance conditions that affect vesting.

Therefore, the performance target should not be reflected when estimating the grant date value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and also represent the compensation cost applicable to the period(s) for which the service has already been provided. If the performance target becomes probable of being achieved before the end of the required service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining required service period. The total amount of compensation cost is recognized during and after the required service period, and should reflect the number of awards that are expected to vest and adjusted to reflect those awards that ultimately vest. The required service period ends when the employee can terminate their service and still be eligible to vest in the award if the performance target is achieved.

Despite my personal lack of consideration of the probability of achieving a target, the guidance in ASU 2014–12 does make sense and perhaps was needed.

Winstead, Art_4x5Art Winstead is a native of Greensboro, NC—he graduated from Grimsley Senior High School, and attended the University of South Carolina, earning his B.S. in Business (with a concentration in Accounting and a minor in Political Science) at the University of North Carolina—Greensboro. Art is also a Certified Fraud Examiner (CFE), Certified Financial Forensic (CFF), and holds the designation of Chartered Global Management Accountant (CGMA). He is a member of AICPA and is a member of NCACPA’s Board of Directors. Art has served on the State Mobility and Regulatory Response Committees of the National Association of State Boards of Accountancy (NASBA) and currently serves on the Global Standards Committee.