FASB 123(R) Shared Based Payments

On December 16, 2004, the FASB issued Statement 123(R) Share Based Payments. The statement requires that all equity based awards to employees be recognized in the income statement based upon their fair value. The effective date for non public entities is the first annual period that begins after December 15, 2005 (e.g. fiscal years ending December 31, 2006). The following is a brief summary of the changes that will affect your business and financial statements.

1. Transition Method – Non-public entities that previously applied FAS 123 using the minimum value method will use the prospective method.

The prospective method requires the following:

a) Continue to account for non-vested equity awards outstanding at the date of adoption of FAS 123(R) in the same manner as they had been accounted for prior to adoption.

b) All awards granted or modified after the date of adoption should be accounted for using the measurement recognition and attribute provisions of FAS 123(R).

c) Precluded from disclosing proforma information.

2. Valuation Overview - The two most common option pricing models are the Black Scholes model and the Lattice or Binomial model.

a) The major change for non-public companies is that they will be required to input the expected volatility. Non-public companies may use an alternative method (calculated value) if they can not estimate volatility.

b) Stock Price – One of the key inputs into either model is the stock price. This stock price needs to be the fair market value at the date the options are granted. Therefore, for non-public entities this will require an outside valuation of the Company's stock. If the Company is going to issue stock options in 2006, it should plan on obtaining an external stock valuation.

The above only highlights changes implemented by FAS 123(R). We recommend that you contact your external CPA firm and have a discussion regarding FAS 123(R) and how it is going to affect your Company. If you have any questions or if we can help you in any way, please feel free to telephone Tom Feeley at (617) 456-2400 or email TomF@fdcpa.com. We also invite you to visit the Feeley & Driscoll web site at: www.fdcpa.com/techlife.htm.

Click on this link to access the full statement

http://www.fasb.org/pdf/fas123r.pdf

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