Stock Options issuances and exercises under FAS 123R may impact different aspects of the tax provision.

 

•You must consider both pre-adoption FAS 123R and post-adoption FAS 123R rules when providing for the Stock Based Compensation in the provision.

•Track the APIC (Additional Paid in Capital) Pool balance to ensure proper treatment of the exercises in the future.

•Activate the APIC Pool system parameter to view the APIC Pool report.

 

Pre FAS 123R and Incentive Stock Options

At Issuance

There is no impact on the tax provision on issuance.

 

Upon Exercise

•Typically these options, when exercised, impact the Current Tax Expense, which offsets in Equity.

•This type of option was vested before the adoption of FAS 123R or consists of qualifying distributions of Incentive Stock Options (ISOs).

•To impact the current provision and an offset in equity, enter the option expense details as a permanent difference with Type E for Equity Adjustment.

 

Stock Based Compensation

At Issuance

•Certain options issued and vested after the adoption of FAS 123R are amortized as stock-based compensation expense for book.

•For tax, you must reverse stock-based compensation amortization during the vesting of options. You can accomplish this by entering the amortization amount as temporary difference activity.

•Reversing the book expense builds a Deferred Tax Asset that can later be offset when options are exercised.

 

Upon Exercise

•Options issued and vested after the adoption of FAS 123R or disqualifying distributions of ISOs that are exercised generate a Current Tax Expense. The offset to the current tax expense may be to Equity or may have an impact on P&L.

•You enter the option expense as activity for the temporary difference that was created during the vesting period.

•You must determine the Excess Benefit/Detriment treatment.

•Enter Excess Benefit or Windfall (tax expense is greater than the book expense) as a Balance Sheet Only adjustment to the temporary difference to remove the remaining deferred tax liability created when the tax expense was taken. The same amount is an addition to the APIC pool.

•Excess Detriment or Shortfall (tax expense is less than the book expense) requires measurement against the APIC pool to determine if there is available APIC to offset the detriment. If there is capacity in the APIC pool, enter the detriment as a Balance Sheet Only adjustment to the temporary difference to remove the remaining deferred tax asset. If there is no APIC pool or not enough to absorb the entire detriment, enter the excess amount as a Deferred Only adjustment to the temporary difference. The excess detriment will reduce the APIC pool. Be sure that the APIC pool does not go below zero.