Reporting on Employee Stock Compensation Plans: Case Not Closed
Stock compensation plans are complex and a sophisticated analysis is a prerequisite to sound reporting. An accountant must understand what events and transactions can occur as an employee acquires, vests and exercises rights under an employee stock compensation plan. For example, even if two types of plans affect employees similarly, the employer may have to report on them differently under current rules. Yet the Financial Accounting Standards Board has backed away from even defining the term "compensation cost" as it is used with regard to these plans--and therefore from facing the even more fundamental issues of whether and when the employer incurs such costs under the plans. In March 1988, four years into the FASB's project of reexamining financial reporting on employee stock compensation plans, FASB Chairman Dennis Beresford described the area as "extremely complex." Soon afterward, the board acknowledged it was unable to agree on "a conceptually valid and practical improvement to current accounting for stock compensation." It folded the project into its financial instruments project. The history of the project made that result understandable, and probably inevitable, because the FASB had avoided grappling with what it described as a "fundamental conceptual issue." THE BACKGROUND: TOO LIMITED A SCOPE When it initiated its project on stock compensation plans in May 1984, the FASB issued an invitation to comment on Accounting for Compensation Plans Involving Certain Rights Granted to Employees. The invitation was based on an issues paper, Accounting for Employee Capital Accumulation Plans, which the American Institute of CPAs accounting standards executive committee (AcSEC) had prepared and sent to the fASB in November 1982. The invitation also contained some explanatory material on stock compensation plans and questions on which to comment. But the FASB eliminated much of the conceptional analysis that was contained in the AcSEC's issues paper from its invitation to comment. The board dismissed the AcSEC's analysis as "beyond the scope of this project." THE CENTRAL ISSUE Compensation cost is presumably the cost an employer incurs in providing benefits to the employees under the plan. The view that employers do not incur such a cost, which the AcSEC presented in its position paper and the FASB stated was beyond the scope of its project, was described in the FASB's invitation to comment: "[A]n enterprise does not incur a cost (in the sense of giving up something of value to it) in a nonreciprocal transfer, such as by issuing stock for employees' services; therefore, a nonreciprocal transfer results in a dilution of interest to existing shareholders instead of a cost to the enterprise." To say this differently, there are two issues: 1. Is the transfer in which a particular employer receives services nonreciprocal? 2. If it is, does that employer even incur compensation cost when it receives services, and possibly cash, under a stock compensation plan? How these issues could be beyond the scope of a project considering how to report on these plans is not clear. Instead, because the question of how to report on them is in fact "extremely complex," it would be reasonable to expect the FASB to explore every avenue that might offer guidance. THE GENERAL RULE--A GUIDELINE? As the AcSEC issues paper recognized, the question of whether cost is incurred in nonreciprocal transfrs is a settled issue in financial reporting. The issues paper referred to Accounting Principles Board Opinion no. 29, Accounting for Nonmonetary Transactions (a pronouncement on the same level as FASB accounting standards in the hierarchy of generally accepted accounting principles). Opinion no. 29 defines a nonreciprocal transfer as "a transfer in one direction of resources or obligations, either from the enterprise to other entities or from other entities to the enterprise. …