How Does the FASB’s New Guidance on Employee Share-based Payment Accounting Affect Your Business?
As part of an ongoing effort to simplify and improve the usefulness of financial reporting, the Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2016-09, which will change several aspects of the accounting for share-based payments to employees. The changes can be summarized in the following four areas:
- Accounting for income taxes: All excess tax benefits and tax deficiencies resulting from the difference between the deduction for tax purposes and the GAAP-based compensation cost recorded will be recognized as income tax expense or benefit in the income statement. This eliminates the need to recognize excess tax benefits in additional paid-in capital. Additionally, companies will be able to recognize excess tax benefits even if the benefit increases a net operating loss carryforward. As a result of these changes, excess tax benefits should be presented as an operating activity rather than a financing activity on the statement of cash flows.
- Statutory tax withholding requirements: Employers will be allowed to withhold up to the maximum statutory tax rate in the applicable jurisdictions to cover income taxes on awards while still maintaining equity classification of the awards. This guidance also specifies that cash paid by an employer to a tax authority when directly withholding shares to satisfy its statutory tax withholding obligation should be classified as a financing activity on the statement of cash flows.
- Accounting for forfeitures of awards: Companies will be required to make an accounting policy election to calculate compensation cost by either estimating the number of awards that are expected to vest, which is required under current GAAP, or accounting for forfeited awards as they occur.
- Practical expedients for nonpublic companies:
- Expected term: Companies can make an accounting policy election to estimate the expected term for awards with service or performance conditions that meet certain criteria using a practical expedient.
- Intrinsic value: Companies can measure liability-classified awards at intrinsic value rather than fair value.
The provisions of ASU 2016-09 are effective for public companies for fiscal years beginning after December 15, 2016 and for all other entities for fiscal years beginning December 15, 2017. Early adoption is permitted, and all provisions must be adopted in the same period.
The full guidance is available here.
If you need assistance determining how this guidance will affect your business, Holtzman Partners is happy to help. Please contact us directly at 512.610.7200 or submit your inquiry online.