FASB Proposed FSP FAS 123R-e

June 8, 2006

FEI Summary

On June 8, 2006, the Financial Accounting Standards Board (FASB) released Proposed FASB Staff Position (FSP) No.  FAS 123R-e, “Amendment of FSP FAS 123R-1.” [FSP FAS 123R-1 is: “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R).”]  

Summary

The proposed FSP:

n       Addresses whether a modification of an instrument in connection with an equity restructuring or a business combination should be considered a modification for purposes of applying FSP FAS 123(R)-1; and

n       Provides FASB staff’s position that:

• for instruments originally issued as employee compensation and then exchanged or changed, and
• the only change is made to the terms of an award to reflect an equity restructuring or a business combination that occurs when the holders are no longer employees, then:

• no change in the recognition and measurement (due to a change in classification) of those instruments will result under the following conditions:

a.       Either there is no increase in value to the holders of the instrument or the exchange or change in the terms of the award is not made in contemplation of an equity restructuring or a business combination.

b.       All holders of the same class of equity instruments (for example, stock options) are treated in a similar manner.

Effective date and transition

n       Proposed effective date is first reporting period beginning after the date the (final) FSP is posted to the FASB website (www.fasb.org). 

n       Entities that did not apply FAS 123(R) in a manner consistent with the provisions of this FSP would be required to retrospectively apply the provisions in this FSP to prior periods when those periods’ financial statements are included for comparative purposes with current-period financial statements.

n       Early application of this FSP is permitted in periods for which financial statements have not yet been issued.

Comment Deadline

There is a 30-day comment period on the proposed FSP, ending July 8.

Prepared June 8, 2006 by Edith Orenstein (eorenstein@FinancialExecutives.org), Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not represent FEI opinion, unless specifically noted above