As part of its ongoing effort to simplify some aspects of accounting requirements, the Financial Accounting Standards Board has issued proposed updates to accounting standards that would target complexities in the accounting for stock compensation plans and the equity method of accounting.
With respect to stock compensation, FASB gathered its notes from the post-implementation review of the accounting standard requiring expensing of stock options, from pre-agenda research for its Private Company Council, and from outreach on ways to simplify accounting standards to identify several possible improvements to the accounting requirements. The board has proposed eight separate measures that would revise the requirements around income tax consequences, classification of awards as equity or liabilities, and classification of cash flows that are intended to make the accounting easier. Some of the changes are focused only on nonpublic entities.
FASB is proposing, for example, to allow all excess tax benefits and deficiencies to be recognized as income tax expense or benefit in the income statement, rather than routing excess tax benefits through additional paid-in capital and tax deficiencies as an offset to accumulated excess tax benefits. FASB also is proposing the allow excess tax benefits to be mingled with operating activity cash flows rather than having them separately classified under financing activity. Additional proposed simplifications focus on forfeitures, minimum statutory tax withholding requirements, classification of employee taxes paid, classification of awards with repurchase features, and intrinsic value. FASB also is proposing a practical expedient around the expected term.
For equity method accounting, FASB is proposing a revision to Topic 323 in the Accounting Standards Codification to eliminate the requirement for equity-method investors to account for the “basis” difference, or the difference between the cost of an investment and the investor’s proportionate share of the net assets of the investee. Current guidance requires an entity to determine the acquisition date fair value of the identifiable assets and liabilities just as would be done for a business combination. The entity’s proportionate share of the difference between fair value of those assets and liabilities and their book value would be accounted for as net income in following periods.
That’s a costly exercise, stakeholders have told FASB, without producing information that’s useful. That led FASB to propose dropping the basis difference requirement and allowing entities to recognize its equity method investment at its cost without determining the acquisition date fair value of assets and liabilities. The proposal also would drop the requirement for equity method investors to retroactively allocate fair value of the basis difference and adjust prior earnings.
For the stock compensation proposals, FASB is asking for feedback by Aug. 14. For the equity method proposal, FASB is open to comment through Aug. 4. Effective dates for any changes in the rules will be established by the board as it considers feedback and makes final decisions on how the rules will change.