By Raul Fajardo. On March 30, 2016, the FASB issued an ASC 718 update, ASU 2016-09, as a part of its Simplification Initiative. In part 1 of our blog series, ASC 2016-09: Simple But Complex, we explored the changes to accounting for income taxes and the elimination of the APIC pool. Here we will discuss another key provision of the FASB’s new standard, accounting for forfeitures.
Under the old rules, companies were required to come up with a forfeiture estimate for expensing purposes. Under the new rules, companies have the choice to continue applying a forfeiture estimate or account for forfeitures as they occur. Note though that companies have a choice on how to account for forfeitures upon adoption of the new standard, but any change subsequent to adoption of ASU 2016-09 will be considered as a change in accounting principles.
This is the amendment where companies have a key decision to make on how to account for forfeitures. For companies that have difficulty coming up with an estimate, then it might be simpler to account for forfeitures as they occur. For companies that choose to account for forfeitures as they occur, they would also have to book a cumulative adjustment to account for the change.
For companies that have a good process in estimating forfeitures, they might opt to continue their current process and use an estimate. Depending on the estimate and true up methodology used, the forfeiture estimate may smooth out the expense over the vesting period and reduce expense volatility, while accounting for forfeitures as they occur could result in more expense volatility when there is a lot of turnover.
Remember, early adoption is permitted, but all provisions of the update must be adopted at the same time. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
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 a company struggles in coming up with a forfeiture estimate, then adopting the forfeitures as they occur could eliminate that challenge. Note that you cannot adopt one provision of the standard and not the others, it’s all or nothing.
At Certent, our product enables clients to easily produce the reports they need to comply with ASU 2016-09, and our expert services organization is ready to provide guidance to help make the transition as easy as possible. If you’re using Excel to manage your equity plan or not getting the support you need from your current vendor, contact us to learn how we can help.
Raul 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.