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At Issuance
| • | Certain options that were issued and vest after the adoption of FAS 123R are amortized as stock-based compensation expense for book. |
| • | For tax, stock-based compensation amortization must be reversed during the vesting of options. This can be accomplished 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 that were 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. |
| • | The option expense should be entered as activity for the temporary difference that was created during the vesting period. |
| • | The Excess Benefit/Detriment treatment needs to be determined. |
| • | Excess Benefit or Windfall (tax expense is greater than the book expense) should be entered as a Balance Sheet Only adjustment to the temporary difference to clear the remaining deferred tax liability created when the tax expense was taken. The same amount should also be 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 clear 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 should reduce the APIC pool. Be sure that the APIC pool does not go below zero. |
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