Press Room: Tax Release

April 13, 2016

Simplification of Accounting for Share-Based Compensation

On March 30, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting. The purpose of this ASU is to simplify certain aspects related to ASC 718, Compensation – Stock Compensation.

Even though the intended purpose of the amendments is to simplify the complexity of accounting for share-based payments, the changes may significantly impact net income and earnings per share on an annual basis and result in volatility in a company’s effective tax rate.

Summary of Key New Provisions

Accounting for Income Taxes

  • All excess tax benefits (windfalls) and tax deficiencies (shortfalls) related to share-based payments are reflected through the income statement as discrete items upon settlement or expiration of the award, rather than through additional paid-in capital.
    Transition Requirement: Applied prospectively.
  • All windfall benefits will be recognized at the time of settlement regardless of whether the windfall results in a reduction of current taxes payable.
    Transition Requirement: Modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period adopted.
  • All related cash flows from share-based compensation are to be reported as operating activities in the statement of cash flows.
    Transition Requirement: Applied using prospective transition method or retrospective transition method.

Forfeitures

  • An entity may make an entity-wide accounting policy election to reflect forfeitures as they occur or use the current GAAP treatment of estimating the number of awards expected to vest.
    Transition Requirement: Modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period adopted.

Withholding Income Taxes

  • An entity may withhold a number of shares for income taxes in an amount up to the employees’ maximum individual income tax rate in the applicable jurisdictions.
    Transition Requirement: Modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period adopted.
  • Cash paid by the employer for the number of shares withheld to cover its withholding obligation should be reported as financing activities in the statement of cash flows.
    Transition Requirement: Applied retrospectively.

Expected Term

  • Non-public entities may make an accounting policy election to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that meet certain conditions.
    Transition Requirement: Applied prospectively.

Intrinsic Value

  • Non-public entities may make a one-time accounting policy election to switch from measuring all liability-classified awards at value to intrinsic value.
    Transition Requirement: Modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period adopted.

Effective Dates

For public entities, these amendments are effective for annual periods beginning after December 16, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.

Early adoption is permitted for any entity in any interim or annual period as long as all amendments are adopted in the same period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period.

The Takeaway

Your company will need to make a determination as to the timing of their adoption of this new ASU. During this process, your company will need to calculate any cumulative, beginning-of-the-period, retained earnings adjustment for unrecorded windfalls and forfeiture adjustments, analyze the need for any valuation allowance adjustment, and consider the impact on your company’s effective tax rate.