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Accounting Improvements for Share-Based Payments

Accounting Improvements for Share-Based Payments

In March 2016 the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The intention of the new guidance is to simplify certain aspects of the accounting for stock-based compensation. Some of the provisions apply to all companies, while others are specific to nonpublic companies only. The changes are significant and worth a closer look.   

Nonpublic Company Provisions

Accounting for stock-based compensation can be complex for nonpublic companies. The new guidance includes the following elections, available exclusively to nonpublic companies.

Intrinsic Value Election. Companies can make a one-time accounting policy election to switch from measuring all liability classified awards at fair value to intrinsic value. Intrinsic value is the difference between the fair value of the underlying shares and their exercise price. 

Practical Expedient for Expected Term. Nonpublic companies can make an accounting policy election to apply a practical expedient (shortcut) to estimate the expected term for all awards with performance or service conditions.

  • If a qualifying award includes only a service condition, the expected term would be estimated as the midpoint between the vesting date and contractual term.
  • If vesting of an award includes a performance condition, an entity would first assess, at the grant date, whether the performance condition is probable of being achieved.
  • If probable, the expected term would be estimated as the midpoint between the requisite service period and the contractual term of the award.
  • If not probable, a specified service period, if any, would be used.

 

Provisions for All Companies

 

Current GAAP

Summary of Simplifications

Forfeitures

Accruals of compensation cost are based on the number of awards expected to vest.

Companies can make an accounting policy election to use current GAAP or account for forfeitures when they occur.

Accounting for Income Taxes

Companies must determine for each award whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes results in either an excess tax benefit or deficiency. Excess tax benefits are recognized in APIC, and deficiencies are recognized in the income statement to the extent they exceed accumulated excess tax benefits. Excess tax benefits are not recognized until the deduction reduces taxes payable.

All excess tax benefits and deficiencies should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur.

Companies also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.

Classification of Excess Tax Benefits on the Statement of Cash Flows

Excess tax benefits must be separated from other income tax cash flows and classified as a financing activity.

Excess tax benefits should be classified along with other income tax cash flows as an operating activity.

Minimum Statutory Tax Withholding

One of the requirements for an award to qualify for equity classification is that it cannot be settled in cash in excess of the employer’s minimum statutory withholding requirements.

The threshold to qualify for equity classification permits withholding up to the applicable maximum statutory tax rates.

 

Effective Dates

ASU 2016-09 is effective for public companies for annual reporting periods beginning after December 15, 2016, and all interim periods within the annual periods. The provisions apply to nonpublic companies for annual periods beginning after December 31, 2017.

Author(s)

Gina Skibo
Gina C. Skibo, CPA
Partner
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