On March 30, 2016 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU), 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 officially amends ASC 718, Compensation – Stock Compensation. These simplifications are expected to result in significant changes to net income and accordingly earnings per share.
Key Adopted ASC 718 Simplifications
ASU 2016-09 contains various provisions intended to simplify the accounting for and financial statement presentation of share-based compensation. This True Alert will focus on the updates from an accounting for income tax perspective.
Accounting for Income Taxes Impact
A major modification once adopted, requires all tax effects related to share-based payments to be recorded directly through the income statement, as opposed to the portion, if applicable, to APIC. This includes tax deductions which are in excess of the corresponding compensation costs generating an excess tax benefit (“windfall”), and the opposite in which the compensation costs are in excess of the corresponding tax deductions generating a tax deficiency (“shortfall”). Currently, excess tax benefits are recorded to APIC, and tax deficiencies are first recorded as a reduction to the cumulative excess tax benefits (“APIC Pool”) if available, and then to the income statement. This modification will be required to be applied on a prospective basis for all excess tax benefits and tax deficiencies generated after the interim or annual period of adoption.
In addition, another major modification removes the requirement to defer recognition of excess tax benefits until a corresponding reduction to current income taxes payable occurs. This modification will be required to be applied on a modified retrospective basis, with an adjustment to beginning retained earnings upon the interim or annual period of adoption.
From an interim reporting perspective, excess tax benefits and tax deficiencies will continue to be treated as a discrete item and therefore excluded from the determination of the forecasted annual effective tax rate.
From a cash flow presentation perspective, share-based payments should be presented as an operating activity. This modification is available on either a prospective or retrospective basis.
ASU 2016-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, and respective interim reporting period. For all other entities, it is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within annual periods beginning after December 15, 2018. Early adoption is available for all entities in any interim or annual period. If early adoption is selected, any adjustments should be reflected as of the beginning of the fiscal year of adoption. Also, an entity that elects early adoption must adopt all of the amendments in the same period.
What to Expect?
The overall goal of the modifications is intended to reduce the complexity and associated costs of accounting for share-based payments. However, with significant modifications to any procedure, additional costs/hurdles are expected including changes to the overall process, system modifications, tax analysis, and corresponding internal controls.
In addition to the adoption process, significant changes are expected to financial statement presentations including net income and earnings per share as the tax implications of all excess tax benefits and tax deficiencies will directly impact the income statement.
With the release of ASU 2016-09, now is the time to analyze your current share-based compensation structure and gain a level of comfort regarding the upcoming financial statement reporting impact of the adopted simplifications. Our share-based compensation and accounting for income tax experts at True Partners Consulting have the knowledge and expertise in this area to assist all taxpayers in evaluating their current share-based compensation structure to recommend and implement practical approaches to follow the adopted simplifications on their near future financial statements.
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John P. Bennecke
Regional Managing Director and National Practice Leader
Robert M. Gordon
Managing Director & Assistant General Counsel