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FASB Simplifies Accounting for Employee Share-Based Awards

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Mar 31st 2016
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A new standard issued by the Financial Accounting Standards Board (FASB) on March 30 simplifies how public and private companies account for share-based payments to employees.

“Both public and private company stakeholders identified a few aspects of accounting for employee share-based awards that are unnecessarily complex,” FASB Chairman Russell Golden said in a written statement. “Based on input from those stakeholders – including the Private Company Council (PCC) – the FASB has issued a standard that we believe will simplify the accounting while maintaining the usefulness of information provided to investors.”

Here are areas of employee share-based payment accounting that have been simplified under Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting:

Accounting for income taxes. All excess tax benefits and tax deficiencies, including tax benefits of dividends on share-based payment awards, should be recognized as income tax expense or benefit in the income statement. The tax consequences of exercised or vested awards should be treated as discrete items in the reporting period in which they occur.

An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.

Classification of excess tax benefits on the statement of cash flows. Excess tax benefits should be classified along with other income tax cash flows as an operating activity.

Forfeitures. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur.

Minimum statutory tax-withholding requirements. The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions.

Classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. Cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity.

In addition, the ASU also simplifies two areas specific to private companies:

Practical expedient for expected term. In lieu of estimating the period of time that a share-based award will be outstanding, private companies can now apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics.

Intrinsic value. Private companies can now make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. Previously, private companies were provided an option to measure all liability-classified awards at intrinsic value, but some private companies were unaware of that option.

“In addition to those simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment,” the ASU states. “This should not result in a change in practice because the guidance that is being superseded was never effective.”

Accounting for employee share-based awards was identified by the PCC as an area of concern among private company stakeholders. The PCC worked with the FASB to discuss and analyze the issues that private companies have encountered in this area when applying the standard. The PCC also asked FASB staff to conduct outreach with users as part of the FASB’s pre-agenda research on the topic.

For public companies, the amendments in this ASU take effect for annual periods beginning after Dec. 15, 2016, and interim periods within those annual periods. For private companies, the amendments go into effect for annual periods beginning after Dec. 15, 2017, and interim periods within annual periods beginning after Dec. 15, 2018. Early adoption is permitted for any organization in any interim or annual period.

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