Accounting for Tax Consequences of Instruments Awarded to Employees
[from FASB SFAS 123 Exposure Document, fasb.org, No Doz recommended]
41. Income tax regulations specify allowable tax deductions for instruments awarded to employees under share-based payment arrangements in determining an entity’s income tax liability. Compensation cost recognized under this Statement may be measured based on the fair value of an award. Under existing U.S. tax law, allowable tax deductions are generally measured as the intrinsic value of an instrument on a specified date. The time value component, if any, of the fair value of an instrument generally is not tax deductible. Therefore, tax deductions generally will arise in different amounts and in different periods from compensation cost recognized in financial statements.
42. The cumulative amount of compensation cost recognized for instruments classified as equity that ordinarily would result in a future tax deduction under existing tax law shall be considered to be a deductible temporary difference in applying FASB Statement No. 109, Accounting for Income Taxes. The deductible temporary difference shall be based on the fair value of the instruments recognized as compensation cost for financial reporting purposes. The deferred tax benefit (or expense) that results from increases (or decreases) in that temporary difference, for example, as additional service is rendered and the related cost is recognized, shall be recognized in the income statement. Recognition of compensation cost for instruments that ordinarily do not result in tax deductions under existing tax law shall not be considered to result in a deductible temporary difference in applying Statement 109. A future event, such as an employee’s disqualifying disposition of stock under existing U.S. tax law, can give rise to a tax deduction for instruments that ordinarily do not result in a tax deduction. The tax effects of such an event shall be recognized only when it occurs.
42A. The cumulative amount of compensation cost recognized for instruments classified as liabilities that ordinarily would result in a future tax deduction under existing tax law also shall be considered to be a deductible temporary difference. The deductible temporary difference shall be based on the fair value of the instruments recognized as compensation cost for financial reporting purposes.
43. Statement 109 requires a deferred tax asset to be evaluated for future realization and to be reduced by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Differences between (a) the deductible temporary difference computed pursuant to paragraph 42 and (b) the tax deduction inherent in the current fair value of the entity’s stock shall not be considered in measuring either the gross deferred tax asset or the need for a valuation allowance for a deferred tax asset recognized under this Statement.
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The FASB has covered the *entire* topic in just four paragraphs. Would somebody please translate this into common language?
TIA, Ron |
