New FASB Revenue Recognition Standards May Affect 162(m) Bonus Plans

October 26, 2009

Compensation arrangements intended to comply with the requirements for “qualified performance-based compensation” under Section 162(m) of the Internal Revenue Code must have objective and pre-established performance goals. On September 23, 2009, the Financial Accounting Standards Board ratified new standards for recognizing revenue from bundled sales of products and services. Under the new standards, some companies may see significant increases in revenue in periods following adoption as compared to prior periods. Companies that maintain performance-based incentive compensation arrangements tied to revenue from bundled sales may wish to adjust the performance formulas under those arrangements for periods continuing, or beginning, after the accounting changes become effective. The attached memorandum discusses issues under Section 162(m) relating to such adjustments. It also contains a reminder about an unrelated Section 162(m) issue as to which action before year-end 2009 may be appropriate.