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US FAS-123 (R) Reporting | April 2007
Tax Effects
US companies with awards such as non-qualified stock option grants which give rise to a tax deduction for the corporation at exercise will be able to offset the expense of the options through a deferred tax asset. This deferred tax asset arises to the difference in timing between the recognition of the expense of the option (over the requisite service period) and the actual exercise and taxation of the options (sometime after the requisite service period has been completed). There is also a difference in the expense which has been calculated based on the fair value of the option at grant and the tax deduction which is based on the exercise gain or benefit.
As the corporation amortizes the expense of the option they will also accrue a deferred tax asset based on the corporate statutory tax rate. At the time of exercise, the company is entitled to the tax deduction, the savings is netted out of the deferred tax asset. If the tax deduction is greater than the accrued deferred tax asset this amount is recorded as ‘additional paid in capital’. If the tax deduction is less than the deferred tax asset the amount is netted from the additional paid in capital (assuming there is such a reserve remaining).
FAS Disclosures (US)
With FAS-123(R) corporations are now required to formally disclose a number of details with regards to stock compensation plans. These details are indented to provide a broad- level of understanding to investors of the outstanding plans and their potential diluting effects on an earnings per share basis over the short and long term. This including details such as numbers of awards outstanding, vesting criteria, average fair value, and weighted average exercise price.
