February 25, 2015
Performance-Based Compensation Following FASB’s Change Involving Extraordinary Items
– Broc Romanek, CompensationStandards.com
Here’s the teaser for this memo by Towers Watson:
Last month, the Financial Accounting Standards Board adopted a change in its rules regarding company financial statement presentation that will require companies to review their grants of performance-based compensation.
The FASB change to Generally Accepted Accounting Principles would simplify the income statement presentation requirements in Subtopic 225-20 (“Income Statement — Extraordinary and Unusual Items”) by eliminating the concept of extraordinary items and replacing it with a new standard. Before this change, extraordinary items were defined as events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Once the change is effective, companies would instead disclose items that are either of an unusual nature or of a type that indicates infrequency of occurrence as a separate component of income from continuing operations.
While this change might seem esoteric and of interest only to accountants, some housekeeping may be in order for compensation plans or grants that would exclude the effect of extraordinary items under the existing standard. In the short term, companies making multi-year performance grants in early 2015 should take the time to understand the impact of this change because it can relate both to how performance is measured and tax deductibility under Code Section 162(m). The FASB amendment is effective for fiscal years beginning after December 15, 2015, although companies may apply the amendments retrospectively to prior periods. Performance periods straddling this effective date would be affected.