May 12, 2014
From the Financial Reporting View
In anticipation of an SEC rule proposal that the Dodd-Frank Wall Street Reform and Consumer Protection Act requires for all public companies, some companies are modifying their share-based payment plans to include clawback provisions.
A share-based payment award may include a provision that gives a compensation committee or an equivalent body the discretion to amend terms of the award before it vests. The presence of discretionary clawback features in share-based payments raises questions about whether the criteria for the awards to have a grant date are met. Specifically, one of those criteria is that there is a mutual understanding between the company and the employee of the key terms and conditions of a share-based payment award.
The accounting consequences of discretion clauses vary depending on the terms of the award. If a discretion clause permits the compensation committee or equivalent body to claw back an award as a result of subjective triggering events and/or provides for latitude to determine the consequences of a triggering event, there likely would not be a mutual understanding between the company and the employee of the terms and conditions and, therefore, the award would not have a grant date until the period for exercising the discretion passed. For example, if the compensation committee has discretion to decide whether a clawback is triggered or what the consequence of the clawback would be based on a subjective evaluation of the facts and circumstances that led to a restatement of the company’s financial statements, the employee would not be in a position to understand how those factors ultimately would be evaluated. In those situations, a grant date is not established and the facts and circumstances would need to be evaluated to determine how to account for an award before the grant date.
Another variation of a discretionary clawback that some companies have proposed is based on an assessment that an individual employee acted in a manner that subjected the company to excessive financial risk, with only vague definitions about how the occurrence of that risk would be measured and/or the consequences if the company determined that the risk created by the employee’s action was in fact excessive. In these circumstances, the company must consider FASB ASC paragraph 718-10-55-108, which describes the conditions that require designation of service inception before the grant date. If those conditions are met (which is likely), the award would be remeasured throughout the service period until there is a grant date. In the less likely scenario that those conditions are not met, there would be no accounting until a grant date was established, which would affect both the measurement of the award and the attribution period.
In contrast, some awards have discretion clauses that may be invoked with cause or in exceptional circumstances only. There may be situations in which there is sufficient specificity about the types of conditions that would be considered cause or exceptional circumstances and the consequences to the employee if they occur, to support the conclusion that there is a grant date. If so, modification accounting would apply if the compensation committee or equivalent body exercised its discretion.
Some companies have provisions for clawbacks in response to specific objective events. For example, if there was a clause providing for the clawback of all awards if a restatement of the company’s financial statements indicated that a performance condition that was previously believed to have been met was not met, there would be a grant date. If the awards were clawed back in that circumstance, the general guidance on clawback provisions would apply.
For additional guidance about the effects of discretion clauses on determining grant date, see Paragraph 4.037 of KPMG’s Share-Based Payment, and FASB ASC Topic 718, Compensation—Stock Compensation. For additional guidance about the effects of objective clawback provisions on the accounting for share-based payments see Paragraph 2.086 of KPMG’s Share-Based Payment. After clicking on the links, log on to ARO.