FASB Proposes Accounting Standards Update for Equity Comp

By Don Gillotti. On June 8th, 2015, The Financial Accounting Standards Board (FASB) issued an exposure draft detailing the proposed amendments to the current employee share-based payment accounting standards as part of an initiative to reduce complexity surrounding the current accounting standards. As stated in the exposure draft, the FASB feels that, “The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements.” Here are a few of the main provisions and what they could mean to your current ASC 718 processes.

The first proposed update addresses the current GAAP process of accounting for income taxes. Under the current rule, an entity must determine for each award whether the difference between deductions for tax purposes and the compensation cost recognized will result in an excess tax benefit or tax deficiency. The resulting determination is either recognized as additional paid-in capital (tax benefit) or as an offset to accumulated excess tax benefits. The proposed simplification is to recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. The company would also be required to recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.FASB

Another proposed update is in regards to forfeiture rates. Current standards state that accruals of compensation cost are based on the number of awards that are expected to vest. Under the simplified proposal, an entity would make an accounting policy election to either estimate the number of awards that are expected to vest (as they currently do under GAAP), or to account for forfeitures at the point when they occur.

At initial adoption of ASC topic 718, nonpublic entities were provided the option to measure all liability awards at intrinsic value. As stated by the FASB, some nonpublic entities were unaware of this option. The proposed change would allow nonpublic entities to make a one-time election to switch their measurement vehicle from fair value to intrinsic value for all liability-classified awards.

The FASB proposal includes several other simplifications including: classification of excess tax benefits on the statement of cash flows, minimum statutory tax withholding requirements, classification of employee taxes paid on the statement of cash flows when an Employer withholds shares for tax withholding purposes, classification of awards with repurchase features, and practical expedient – expected term.

Currently, the proposed changes are open for feedback and questions until August 14, 2015. At that point transition requirements and amendment effective dates will be listed, should the proposed changes move forward. For more information and details for submitting your feedback to the board, you can find the FASB’s full exposure draft here. You can also download Accounting for Equity Compensation: A Primer which lists five key steps you can take to properly account for your equity compensation program and ensure compliance with ASC718 guidelines.

What are your initial thoughts on the proposed updates? Post your comments below!

Don Gillotti