Background
Recently, the issues on accounting for modifications in the employees share based plans have been a topic for discussions among various interest groups. The Financial Accounting Standard Board (FASB) has issued clarification on the issues surrounding the accounting treatment of the modifications in the employees share based plan. The news in this regards came on March 11, 2017 wherein FASB clarified the definition and scope of modifications in relation to employee share based plans (Wolfe, 2017). The issue in this area arose due to ambiguities in the definition of modification given in the accounting item 718, “Compensation Stock”.
The definition of modification given in the accounting topic 718 covers a change in any of the terms or conditions of share based payment plan. Therefore, the definition does not specify anything in this regards. The scope of definition is quite large as it covers every change in any of the terms or conditions of the share based payment plan extended to the employees (Wolfe, 2017). Due to this ambiguous definition, there has arisen confusion among the companies as to which terms and conditions would require accounting considerations. The companies are facing problems in accounting for modifications in the employees share based payment plans. Further, it has been observed that different companies are adopting different practices in regards to accounting for modifications of the employees share based plans (Wolfe, 2017).
In order to resolve the problems of companies, the Financial Accounting Standard Board (FASB) has issued clarification on the definition of the term, “Modification” given in accounting topic 718. In the clarification, the FASB has specified as to changes in the terms and conditions of the employees share based plan which will be termed as modification and hence will require accounting treatment as prescribed for the modifications. Further, FASB has issued a new standard on accounting for compensation stocks. This new standard is aimed to clarify the ambiguities earlier contained in the accounting standard and it is expected to reduce the diversity in the accounting treatment employed by different entities (Wolfe, 2017).
The compensation stocks also known as employee share based payment plans are popular among the big corporations. These companies provide high value employee compensations in the form of shares. The accounting for employee share based payments carries special features because the compensation to employee is given at a future date (PWC, 2015). Under the employees share based payment plans, the company offers specified number of stocks to the employees upon the conditions to stay in employment for a specified period. Though, the payment is made at a specified date in future but the liabilities for payment accrues each year as the employee progresses toward completion of specified terms of employment (PWC, 2015).
In regards to the accounting for employee share based payments, the entity needs to analyze the facts of the situation to identify as to whether the payments are being made to the person in the capacity as employee only (FASB, 2014). The shares issued to a person who is employee as well as shareholder of the company will not fall under the category of employee share based payments if the shares were issued to him in the capacity of a member. For example, Mr. X is an employee of XYZ Ltd and he also holds 100 shares of the company. After one year, the company announces share based payment plan for employees and after days to such announcement, the company also gives bonus to the existing shareholders. Now, the shares issued as bonus shares to Mr. X will not form part of employee share based payment plan and thus, the same are required to be treated separately (PWC, 2015).
News Article Description
Further, the entities are required to follow special rules in regards to accounting for employees share based payments. As per the rules, the entity is first required to make estimation of expense that will accrue on account of employee share based payment. The estimation of expense is made on the basis of certain assumptions such as number of employees expected to complete the vesting conditions and fair value of the stock options offered. Further, there are other terms and conditions such as vesting period, exercise period, and post acquisition restrictions on transfer of shares (EY, 2010). The estimation of expenditure is made on the basis of best information available on the balance sheet date each year. However, further changes are required in the amount of expenditure initially measured if the changes in the terms and conditions take place (EY, 2010).
In case the terms and conditions changes after the initial estimations being prepared for the expense amount, the changes are incorporated in the accounts and accounting for these changes is termed as modification. As per the accounting rules, if the changes in terms and conditions result in increase in the expenditure in future, such increased expenditure is recognized in the books over the period of time (EY, 2010). However, in case the changes in the terms and conditions of share based payment plan result in decrease in the future expense, it is recommended to not to incorporate such changes for accounting purposes. This accounting treatment for modification of share based payment plan is based on the accounting concept of prudence (Marriott, Edwards, & Mellett, 2002).
The accounting concept of prudence requires that an entity should not overstate the revenues or understate the expenses. In other way, the entity should not recognize the unrealized profits and gains but it must provide for the foreseeable losses which might occur in future. The same concept is applied in accounting for modifications in the share based payment plans. If the modifications result in increase in expense, the same is recognized in the books over the number of periods, however, if it results in lowering the expenditure, the same is ignored (Marriott, Edwards, & Mellett, 2002). The news article analyzed in this paper addresses an issue related to accounting for modifications in the share based payment plans. The news article provides that the entities had confusion in regards changes in the terms and conditions of the plan which require consideration for the accounting purposes.
The principles of normative accounting theory could be correlated with the accounting issue discussed in the given news article. In relation to accounting process, the normative accounting theory postulates what should be rather than what it is. This implies that the normative accounting theory provides for investigation into the situation with a future looking approach (Porwal, 2001). The accounting standards issued by the accounting bodies are generally based on the normative accounting theory. The accounting body prescribes accounting standards on the issues governing financial reporting of the entities. The accounting standards are framed based on the consideration that what the entities should report in their financial statements (Porwal, 2001).
Discussion on the Accounting Concept Related to the Issues Raised in the News article
Further, the normative accounting theory states that the financial statements of the entity should disclose the economy reality. In the words of MacNeal (1939), the financial statements are misleading if these have been prepared as per conservative conventions (Porwal, 2001). He further states the preparing the financial statements based on the historical cost models and conservative conventions does not depict the true and fair position of the assets and liabilities of the entity. Thus, the normative accounting theory advocates the use of fair values in accounting for the different items of assets and liabilities. The statement of financial position should report the assets and liabilities based on their respective economic values. This implies that the assets should reflect the values which the entity can realize and liabilities should be stated at the values which the entities is expected to pay (Belkaoui, 2004).
The issue being given in the news article in the given case relates to the principles of normative theory of accounting. The issue stated in the news article is related to accounting of the modifications in the share based payment plans. In this regards, FASB issues clarification that the modifications which gives rise to increase in the employee share based payment expenses should be accounted for in the books immediately. Thus, the expense which the entity would be liable to pay in future is recognized at its fair value in the current financial statements (Belkaoui, 2004).
International accounting standard board for secretarial of Insurance contracts has published a revised exposure of draft. A dependable basis of secretarial has been have been proposed in relation with Insurance contracts so that monetary declaration can be easily understood regarding its influence ion cash flow, financial performance and financial position of business entity. There is a need to identify the revised proposal relating to current scenario. Several aspect of current exposure draft needs to be considered as it supports crucial issues when arrangement has been addressed in IASB (Peet & Hartwick, 2015). The specific issues have been addressed by revising suggestion during ongoing process deterioration and amplification for continuation with the insurance contracts. It is regarded that such contracts have adverse impact in economy. Classification thousands of pieces of financial data are done by XBLR technology as inclusion is to be made in the notes to disclosure made with financial statement (Mattessich, 2016). Financial analysts as well as regulators are assisted with such technology usage in for locating it through quicker means.
FASB has issued various Accounting Standards that have been influential for the development of the shared based payments of accounting. The exposure letters have given out various comments in their letters that have been discussed below:
This is an insurance organization that looks to provide property and casualty benefits to their clients. They have commented on the new standard that have been raised by FASB. It is seen that the proposed accounting standard calls for consensus between mentioning parties. Revised conceptual frameworks have been proposed in exposure draft required for financial reporting. A clear, concise and complete and perception that is well recognized are used by IASB and this is intended to improve the overall financial reporting. Such perception is required for easing the users in understanding the standard that is done via the development of IASB and IFRS. When existing framework is compared to exposure draft, it is considered that the areas which comprise of de-recognition, financial reporting and related measurement (Horowitz, 2014).
Application of Prudence in Accounting for Modifications
The existing conceptual framework can easily replace by the introduction of new Exposure Draft. Reason is attributable to the fact that it will help in convention of financial reporting and comes with amplification of objective. Management stewardship of assessment of business entity resources are performed by taking into account various information depicted by the suggested exposure draft. The roles of substance and discretion are easily clarified in the revised framework and it has been under overall momentary coverage. Moreover, there are many other facts that have been clarified in the new exposure draft such as factor contributing to the financial reporting making less relevant (Edwards, 2013). On other hand, significant decision-making proves have also been mentioned in the exposure draft. This mainly relates to dimension that drive through making an allowance for the nature of consequential information as well as acknowledgment. There has been depiction of overall financial position as well as performance in the newly framed exposure draft. Therefore, clear definitions of liabilities as well as assets are mentioned that need wide-ranging supervision for at the bottom of the definitions. The obtainable notional arrangements that are outmoded have also been informed in the new exposure draft (Smith, 2014). It can be depicted for example that the roles of probability from the given description of liabilities as well as assets have been highlighted in Exposure draft.
Master Card, known for their online payment and cashless facility is helpful for the development of the world that will be influential for a safe and better payment method. The company in their letter has felt proud of commenting on the new accounting standard and has explained that the questions that have been given out by FASB has been supported by the company. It is seen that they agree mostly to all the questions that have been forwarded by FASB but disagree to the second question that update of tax benefits in the income statement will not help the organization. The company has only commented on the questions that are relevant to them and they have knowledge about it. These comments are helpful for FASB to undertake a decision.
One of the theories that clearly assumes the fact that there can be inefficiently be operated in favor of any scrupulous character concern and considering economic markets are brittle in nature. Moreover, there is need for economic market to have interference from government for purpose of monitoring as well as giving direction. The work of government is mainly only confined to social interest along with providing regulations for financial institution such as banks. Bank generally functions in the economy by making allocation of resources efficiently along with serving economies with social interest.
The company is honored to comment on the issues related to accounting standard forwarded by FASB. It is seen that the company mainly concentrates on the economic theories that is helpful for serving the society by forming group that is itself in best. Moreover, in a given particular situation, there are several industrial groups that face conflict. Collective attentions in their schedule are not incorporated in industrial group. On the opposing, such groups are not bothered with community interest; rather they are aggravated by self-interest. The regulators need to please the economic groups as they represent the general public managing the financial system. Nonetheless, such groups have the deliberation of upholding their public interest. Lobby management will not be able to done by the group not having authority and stronger are mainly influenced by people have lobby group. Accountability of business cannot be lead to be initiated by any possible legislation as suggested by viewpoint economic interest group theory. This is mainly in relation to presentation of environment and communal legislation for financial interest group in trepidation for the reason for lobbying administration.
FASB depicts spreading of principles in the event of quantification of cost benefit computation and dependable as and when required in the event where apparent cost have been surpassed by predictable payback period. In the event of net monetary value of a new instruction and relating to authoritarian improvement, cost benefit analysis is regarded as practical. Hence, considering the financial aspects, the guideline is to make the measurement of cost as well as benefits. Therefore, it can be seen that the company agrees to all the questions that have been put forward by FASB and therefore, they agree to all the questions.
Delta is an airlines company that aims for the quality service by satisfying the public. Public are usually responsible for creation of such agencies and generate working in support of the business they vigorous in are eventually done by them. If the group associate or controller becomes emotionally attracted and associated with the business they are working in then it is indicative of the fact that business have been detained by them and they are meant fort contributing to benefits of society as a whole.
The association is looking for culture disbursement and trade that is performed when possible in the event if collection manager and associate are extremely emotionally concerned with the business. With the increasing resource allocation, the controlling agencies are documented for distrustful interest of the culture. However, agencies mainly start working for industry interest if they are surrounded by business activities. In addition to this, when the oligopoly industries are controlled by government agencies in the event of corresponding products with work of accounting firms (Patton et al., 2016). Such agencies are deformed into monopoly when business captures such agencies. Hence, the powerful head of group comprised of such agencies and they are considered very powerful and of high position in business. Therefore, it can be said that the company is mainly concerned about the interest of the culture and therefore it is seen that the company agrees to all the questions except the sixth question that the states that the shares for withholding cannot be classified in the cash flow statement as it would have an impact on the culture and the society as the employees are involved.
Reference:
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