Facebook and Accounting for Restricted Stock Units
I've been looking at the Facebook IPO prospectus
http://edgar.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm#fin287954_6
and have to admit I'm puzzled by their accounting for Restricted Stock Units. That is, the units granted pre 2011 will not vest until six-months post IPO. Consequently they have not recognized any expense associated with those grants. However my understanding of the FASB requirements are that an expense must be recognized if it is probable the performance condition (this would constitute a performance as opposed to a market condition) will be achieved. One would think at the time they file the IPO prospectus it is probably the condition will be achieved, and hence, I think they should recognize an expense. Does anyone have any insights? Thanks
Steve
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An IPO, like a change in control, is not considered probable until it actually happens. So it is correct to expense this starting in the quarter in which the IPO actually happens.
Peter Suzman
FAS123 Solutions, LLC
Once the IPO is completed, which I assume is day it goes public and "happens," as Peter writes, is when expensing starts. Below is the disclosure in Facebook's registration statement on how it will handle the accounting and the amount of the earnings charge:
"As of December 31, 2011, we have recognized no share-based compensation expense for Pre-2011 RSUs, because a qualifying event described above had not occurred. In the quarter in which our initial public offering is completed, we will begin recording share-based compensation expense using the accelerated attribution method, net of forfeitures, based on the grant date fair value of the Pre-2011 RSUs. For the Pre-2011 RSUs, if the initial public offering had been completed on December 31, 2011, we would have recognized $968 million of share-based compensation expense on that date, and would have approximately $239 million of additional future period expense to be recognized over the remaining service periods through 2018."
Bruce Brumberg, Editor
www.myStockOptions.com
What is especially interesting is that many of these RSU awards are already vested from a service perspective. The awards had both a service condition and a liquidity (performance) condition - and on day 1, when the liquidity condition is satisfied, 100% of expense will be recognized for the RSU awards that already met the service condition. This will impact earnings negatively in the first period Facebook reports as a public company. (Additionally, FICA payment could be complicated since even though the service and performance conditions will have been met, the RSU awards will not convert to shares immediately.)