Accounting for Performance-based Equity - FASB provides new Clarification 2014-12 - Begins for Periods after 12/15/15

Here's the basics: A performance condition that may be met after a person leaves the company should be treated as a performance vesting-condition, not as a non-vesting condition that changes the Grant Date Fair Value of the award.

Here's FASBs summary and a link to the actual doc.

Summary

Why Is the FASB Issuing This Accounting Standards Update?

Entities commonly issue share-based payment awards that
require a specific performance target to be achieved in order for employees to
become eligible to vest in the awards. Examples of performance targets include
an entity attaining a specified profitability metric or selling shares in an
initial public offering.

Generally, an award with a performance target also requires
an employee to render service until the performance target is achieved. In some
cases, however, the terms of an award may provide that the performance target
could be achieved after an employee completes the requisite service period.
That is, the employee would be eligible to vest in the award regardless of
whether the employee is rendering service on the date the performance target is
achieved.

Current U.S. generally accepted accounting principles do not
contain explicit guidance on how to account for those share-based payments.
Many reporting entities account for performance targets that could be achieved
after the requisite service period as performance conditions that affect the
vesting of the award and, therefore, do not reflect the performance target in
the estimate of the grant-date fair value of the award. Other reporting
entities treat those performance targets as nonvesting conditions that affect
the grant-date fair value of the award.

This Update is intended to resolve the diverse accounting
treatment of those awards in practice.

Who Is Affected by
the Amendments in This Update?

The amendments in this Update apply to all reporting
entities that grant their employees share-based payments in which the terms of
the award provide that a performance target that affects vesting could be
achieved after the requisite service period. That is the case when an employee
is eligible to retire or otherwise terminate employment before the end of the
period in which a performance target (for example, an initial public offering
or a profitability target) could be achieved and still be eligible to vest in
the award if and when the performance target is achieved.

What Are the Main
Provisions?

The amendments require that a performance target that
affects vesting and that could be achieved after the requisite service period
be treated as a performance condition. A reporting entity should apply existing
guidance in Topic 718 as it relates to awards with performance conditions that
affect vesting to account for such awards. As such, the performance target
should not be reflected in estimating the grant-date fair value of the award.

Compensation cost should be recognized in the period in
which it becomes probable that the performance target will be achieved and
should represent the compensation cost attributable to the period(s) for which the
requisite service has already been rendered.

If the performance target becomes probable of being achieved
before the end of the requisite service period, the remaining unrecognized
compensation cost should be recognized prospectively over the remaining
requisite service period.

The total amount of compensation cost recognized during and
after the requisite service period should reflect the number of awards that are
expected to vest and should be adjusted to reflect those awards that ultimately
vest. The requisite service period ends when the employee can cease rendering
service and still be eligible to vest in the award if the performance target is
achieved. As indicated in the definition of vest, the stated vesting period
(which includes the period in which the performance target could be achieved)
may differ from the requisite service period .

How Do the Main
Provisions Differ from Current U.S. Generally Accepted Accounting Principles
(GAAP) and Why Are They an Improvement?

Current U.S. GAAP does not contain explicit guidance on
whether to treat a performance target that could be achieved after the
requisite service period as a performance condition that affects vesting or as
a nonvesting condition that affects the grant-date fair value of an award. The
amendments in this Update provide explicit guidance those awards.

When Will the
Amendments Be Effective?

For all entities, the amendments in this Update are
effective for annual periods and interim periods within those annual periods
beginning after December 15, 2015. Earlier adoption is permitted. The effective
date is the same for both public business entities and all other entities.

Entities may apply the amendments in this Update either (a)
prospectively to all

awards granted or modified after the effective date or (b)
retrospectively to all awards with performance targets that are outstanding as
of the beginning of the earliest annual period presented in the financial
statements and to all new or modified awards thereafter. If retrospective
transition is adopted, the cumulative effect of applying this Update as of the
beginning of the earliest annual period presented in the financial statements should
be recognized as an adjustment to the opening retained earnings balance at that
date. Additionally, if retrospective transition is adopted, an entity may use
hindsight in measuring and recognizing the compensation cost.

How Do the Provisions
Compare with International Financial Reporting Standards (IFRS)?

In December 2013, the International Accounting Standards
Board issued an

amendment to IFRS 2, Share-based Payment, to define the term
performance condition.  Under the new
definition in IFRS 2, a performance target cannot extend beyond the end of the
service period.

That is, a performance target that could be achieved after
the requisite service period would not meet the definition of a performance
condition. Rather, those targets are accounted for as

nonvesting conditions that are reflected in the grant-date
fair value of the award.

Therefore, the accounting treatment under IFRS differs from
the amendments in

this Update under U.S. GAAP.