As we begin another year, it's always a good idea to take the time to review the events that shaped our industry over the past year, and to look ahead at what the new year may bring.
And 2011 is definitely shaping up to be another eventful year for the financial services industry, with several pertinent issues developing, including potential IFRS adoption in the U.S., new equity plan trends, regulation changes, and much more. Here are just a few hot topics we're sure you'll be hearing more about this year:
IFRS
By the end of 2011, the world could be on the road to adopting an international set of standards for financial reporting. The SEC confirmed in 2010 that, while they won't be pushing to have a final decision for U.S. companies by June, they will definitely have one by year-end. If it's a go, U.S. public companies will be required to adopt IFRS within the next five years.
However, while most countries have already begun adopting IFRS, many are also reserving the right to make modifications to the standards, specific to their country's laws and requirements. And while the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are working on a convergence project to create international standards, there are questions of just how uniform the system will be if every country makes their own changes. This is another reason the SEC's decision will have a big impact on the success of IFRS: it will be an indication of the viability of having one set of standards internationally.
So what does this mean for you? If you are a public U.S. company and you haven't already started planning for a potential IFRS adoption, now might be the time to do so. If you're not a public U.S. company, it's still a good time to anticipate how the SEC's decision will affect you.
Performance plans
Performance plans are not a new concept. They have been around in the U.S. since the 70s, and they gained popularity in the U.K. and Europe in the 90s. But now, in a post-recession era of public scrutiny over executive compensation, we are seeing the idea gain increasing popularity in North America. The concept of performance plans is great in theory: compensate people based on their individual performance. But effective and successful performance plans are challenging to design and implement, in no small part because they require companies to be able to quantitatively measure performance and there is no straightforward and simple way to do this.
So while the industry builds momentum and information in this area, we will certainly be hearing more about performance plans in 2011. Download a Solium-sponsored report on performance plans, published in conjunction with the Certified Equity Professional Institute.
Employee communications
At a time when financial literacy levels are dangerously low and people are at risk of not having sufficient retirement savings, it has become more important than ever for employers to provide financial education to their employees. Many people would even argue that it's a company's corporate responsibility to offer this type of education, to substantiate their equity plans and lessen the burden on government support systems.
But mandated or not, there are undeniable benefits to educating your plan participants about their equity plans and retirement strategies. Not only does it promote financially informed and independent employees, it also promotes a healthier work environment.
With more and more attention being paid to these types of communication plans, they are also becoming more sophisticated, global-reaching, and easier to outsource – and will likely continue to do so in 2011. So if you haven't already implemented an employee communications/financial education program, 2011 might be the year to start doing so.
Changes to Section 6039
Last year, changes were rolled out to Internal Revenue Code (IRC) Section 6039, affecting all U.S. companies that grant Incentive Stock Options (ISOs) or offer Section 423 Employee Stock Option Plans. These changes, brought about in an attempt to increase compliance and make the reporting process easier for participants, have already gone into effect for transactions occurring in calendar year 2010 and later, but we will definitely be hearing more about them into 2011.
So if you're not aware of how changes to Section 6039 will affect you, or if you want to ensure your plans are in compliance, now is a good time to do so.
For specific details, see Solium's white paper on this topic.
Cost-basis reporting
In the wake of the excitement around changes to Section 6039 regulations, it seems there is less buzz about cost-basis reporting. Some people even assume this issue will only affect brokers and transfer agents, not issuers.
But while the full implications and scope of impact of cost-basis reporting are often not completely understood, there are requirements that will take effect in January 2011 that issuers need to be aware of and begin to take action on.
What is cost-basis reporting?
Cost-basis reporting is a provision in the Emergency Economic Stabilization Act of 2008 (also known as the bailout bill) that requires the reporting of the actual cost of a security for tax reporting purposes (also to reduce the tax gap and promote tax simplification for individual return filers). The term "cost-basis" covers all costs incurred in purchasing a capital asset, plus or minus any required adjustments (e.g. corporate action, fees, wash sales).
What should I know about cost-basis reporting in 2011?
The Internal Revenue Code Section 6045B (final regulation on 10/18/10) mandates that issuers report corporate actions to brokers. For corporate stock, shares acquired after 1/1/2011 are "covered" under the new legislation and tracking of basis is required. Shares acquired before the effective date are "uncovered."
How is cost-basis calculated?
For shares acquired through an open-market purchase, the cost basis is simply the amount paid for the shares plus any transaction fees (including fees for the sale transaction, if the broker does not report the sale proceeds net of fees on Form 1099-B).
For shares acquired under a stock compensation program, the cost basis also includes any income reported on the employee's Form W-2, in connection with either the purchase or the sale of the shares.
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