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FASB Pursues Improvements to Stock Option Accounting

Tammy Whitehouse | October 14, 2014

The accounting for stock options and other forms of share-based payments is up for a refresh as the Financial Accounting Standards Board begins work on some targeted improvements.

FASB added a project to its agenda to improve the accounting for share-based payments that a company makes to its employees in five specific areas. The board is looking for some improvements that will reduce the complexity and simplify the accounting as part of its broader simplification initiative. And depending on the outcome of some early stage research, changes could be in the wind for the accounting around share-based payments made to non-employees as well.

FASB heard from Financial Accounting Foundation post-implementation review that the share-based payment standard adopted in 2004 under heavy criticism generally works as intended, but is difficult for private companies to apply. FASB Chairman Russ Golden said in August when the board received FAF’s report that there were no immediate plans to take up any rulemaking as a result of the findings.

As it takes up a simplification project, the board made some early tentative decisions around the improvements it has in mind, focusing on the requirements around minimum statutory withholdings, the presentation of employee taxes paid when the company withholds shares to meet those minimum withholding requirements, the accounting for forfeitures, the accounting for income taxes upon vesting or settlement of awards, and the presentation of excess tax benefits.

With respect to withholding requirements, FASB wants to make it easier for companies when an employee uses shares to satisfy the company’s tax withholding obligation. That occurs when a company buys back an employee’s shares to raise the cash to pay the tax. Current rules require companies to measure and classify the entire award as a liability if the fair value of the shares withheld exceeds the minimum tax withholding requirement. FASB now says it would make more sense to allow a company to withhold up to the maximum marginal tax rate in a given jurisdiction without triggering the liability classification, and that a company should classify the cash paid to meet the withholding obligation as a financing activity in the cash flow statement.

The board also decided early on to simplify the requirements around accounting for forfeitures, when employees don’t satisfy the service or performance conditions in awards. FASB decided for share-based payments with only service conditions attached, companies can elect to account for forfeitures as they occur rather than estimating forfeitures, then truing up the estimate later so expense is only recognized on those wards that actually vest.

FASB also asked its staff to look into some additional areas that could make the accounting requirements easier for private companies to apply, such as practical expedients around intrinsic value, expected term, and formula value plans.

In an alert to clients, EY says many companies find the existing requirements around share-based payments complex and costly to apply. “We support FASB’s effort to simplify the accounting for share-based payments for public and nonpublic entities,” EY wrote.