In its ongoing effort to simplify accounting rules where possible, the Financial Accounting Standards Board has issued new guidance to smooth over several rough spots in the requirements around stock compensation.
Accounting Standards Update No. 2016-09 offers a number of improvements that surfaced as areas of concern as FASB helped form its Private Company Council, as it reviewed findings of a 2014 post-implementation review of the historical FAS 123R on share-based payment, and as it performed outreach on its simplification initiative. The new guidance addresses several aspects of how to account for the tax consequences of share-based payments, classification of the awards as either equity or liability, and classification on the statement of cash flow.
“Both public and private company stakeholders identified a few aspects of accounting for employee share-based awards that are unnecessarily complex,” said FASB Chairman Russ Golden in a statement. “Based on input from those stakeholders—including the Private Company Council—the FASB has issued a standard that we believe will simplify the accounting while maintaining the usefulness of information provided to investors.”
With respect to income taxes, for example, existing accounting rules require companies to determine for each award whether there are tax benefits or tax deficiencies arising due to differences in tax and financial reporting. Excess tax benefits are recognized in additional paid-in capital (APIC) while tax deficiencies are recognized either as an offset to accumulated excess tax benefits or in the income statement. Under the simplified standard, all excess tax benefits and deficiencies should be recognized as income tax expense or benefit in the income statement, eliminating the APIC pools.
The new guidance also eliminates the current requirement for excess tax benefits to be realized before companies can recognize them. EY explains in an alert to its clients that companies will need to apply this aspect of the new guidance by recording a cumulative-effect adjustment in retained earnings for excess tax benefits not previously recognized. “A company must assess the realizability of any deferred tax assets it records upon adoption as a result of recognizing excess tax benefits,” EY says. “If a valuation allowance on those deferred tax assets is necessary on the date of adoption, the company will record the valuation allowance in retained earnings.”
With respect to forfeitures, the new rules will allow companies to elect whether they will account for forfeitures of share-based awards either as they occur or by estimation. That practical expedient will be especially useful for private companies, EY notes, but public companies already have a similar simplified method available to them through Securities and Exchange Commission Staff Accounting Bulletin Topic 14.
The new requirements take effect for annual periods beginning after Dec. 15, 2016, with early adoption permitted in any interim or annual period.