ASU 2016-09: Simple But Complex: Part 1

By Raul Fajardo. As part of its Simplification Initiative, FASB issued ASU 2016-09 on March 30, 2016, an update to ASC Topic 718.

For public business entities, the amendments in ASU 2016-09 are effective for annual periods beginning after December 15, 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.

There are a few key provisions of the new standard, and here we will focus on accounting for income taxes and elimination of APIC pool.

Under the old guidance, companies had to keep track of an APIC pool. Excess tax benefits were recognized in APIC, and shortfalls were recognized in APIC if there was a balance in the APIC pool, if not then they were recognized as tax expense. Under the amended rules, the APIC pool has been eliminated and all tax benefits, whether they be windfalls or shortfalls, will hit tax expense directly. On the EPS calculation side, the amended rules eliminated the tax benefit windfall piece in the assumed proceeds calculation.

Among all the amendments, this one received the most comments from issuers during the comment period and majority of them asked the FASB Board to reconsider this amendment.

Tracking an APIC pool can get complicated and eliminating the APIC pool does simplify the accounting, but it also results in an increase to the volatility of income statements. When the company’s stock is up, then windfalls are probably up as well, and when windfalls are up, then tax expense goes down and company’s earnings go up. Conversely, when the company’s stock is down, then shortfalls are probably up as well, and when shortfalls are up, then tax expense goes up and company’s earnings go down. This also complicates forecasting as the windfall/shortfall estimate affects earnings.

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Keeping Up With ASC 718

Each company should evaluate whether it would be beneficial to them to adopt early or if it would be better to wait until the mandatory adoption date. For example, if the changes in the accounting for income taxes results in a significant windfall, then it might make sense to adopt early. And remember when adopting this provision, companies might need closer monitoring on the impact on their financial statements.

Certent clients can rest easy knowing that all of the amendments can be satisfied using existing functionality within our Equity Management solution.  If you’re using spreadsheets to manage and account for your equity plan or if your vendor can’t support your plan, contact us to learn more about how we can help.

Raul FajardoRaul Fajardo is a Customer Support Manager for Certent, Inc. with more than twenty years’ experience in equity compensation. He speaks at various equity compensation conferences on topics such as valuation, accounting, forecasting, tax accounting, and mergers and acquisitions.