Executive Compensation Considerations
This section highlights the frustration of any blog. This discussion is based on the prior discussion of new FASB Interpretation 48 – Accounting for Uncertainty in Income Taxes. So, you need to read that section before you read this discussion. These postings are aimed at raising the awareness of the readers to compensation matters which may be considered “uncertain” under the new financial reporting rules and, as such, should trigger questions from the employer.
FIN 48 focuses attention on tax return positions. To sign a tax return, the position only needs a realistic possibility of success. That is a one in three standard. FIN 48 requires more likely than not, which is something better than a 1 in 2 chance of success. This focuses a lot of attention on tax return positions that involve a degree of subjective decision making. Those issues are very common when it comes to executive compensation.
1. IRC Section 162(m) generally limits the deduction of compensation for certain persons employed by a publicly traded enterprise to $1 million. That is an objective standard. But there are many areas under Section 162(m) that are subject to judgment:
a. Where equity compensation is included was the fair value actually determined at grant date? Was the determination of fair value reasonable?
b. Has there been sufficient disclosure of the terms of the option plan?
c. Can the performance pay exception be relied upon?
2. IRC Section 280G imposes very significant limits on the deduction of compensation triggered by a change in control. Like, 162(m), this includes objective and subjective criteria.
a. Are amounts paid properly classified as reasonable compensation for services rendered following the change in control?
b. Has base year compensation been measured properly?
c. Has the exception for a small business corporation been properly applied?
3. Equity compensation takes many forms – options, restricted stock, phantom stock, stock appreciation rights and others.
a. Was a transfer actually made?
b. Was the date that the property was no longer subject to a substantial risk of forfeiture properly determined?
c. Was the property valued correctly?
d. Have any lapse or nonlapse restrictions been identified and considered?
4. Cash deferred compensation should be easy, but even here there are issues to consider.
a. If services during the deferred period were rendered to multiple entities – who gets the deduction upon payment?
b. Is it deferred compensation or a restricted property award? There are somewhat different deduction timing rules under Section 404 versus Section 83.
c. When did “vesting” occur relative to payment? Is the payment truly deferred compensation?
Please do not assume that this is a comprehensive list. It would be nice if the readers would add other issues to this list to expand the idea of the kind of compensatory devices that are subject to evaluation under this standard.
Tomorrow, we will cover how the standard applies to benefit plans that are subject to a financial statement audit.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)