FASB—Accounting for Share-Based Compensation (Topic 718) Simplifications on the Horizon
On June 8, 2015 the Financial Accounting Standards Board (“FASB”) issued an exposure draft No. 2015-270 proposing to simplify the financial statement reporting of share-based compensation. The exposure draft is entitled “Improvements to Employee Share-Based Payment Accounting” and requests comments by August 14, 2015. The proposed modifications regarding Accounting Standards Codification 718 (“ASC 718”) will have significant implications from both a public and private company financial statement reporting perspective. The proposed simplifications, if adopted, would be applicable as of the beginning of the annual period in which the guidance is effective, which has yet to be determined.
The FASB exposure draft issued on June 8, 2015, focuses on several key aspects including the income tax consequences, classification of awards as either equity of liabilities, and the statement of cash flows classification. In addition to the general topics stated above, FASB addresses the following specific areas per the board’s feedback regarding the simplification of financial statement reporting for share-based compensation:
- Accounting for income taxes financial reporting treatment/recognition of excess tax benefits or tax deficiencies
- Statement of cash flows classification of excess tax benefits
- Accounting for forfeitures
- Minimum statutory reporting tax withholding requirements
- Statement of cash flows classification regarding employers withholding shares for withholding purposes
- Balance sheet classification of awards with repurchase capabilities
- Nonpublic entity estimation of expected term for all awards
- Nonpublic entity election to change from fair value to intrinsic value regarding liability classified awards
- Elimination of the indefinite deferral within topic 718
The key observations from an accounting for income tax perspective involve the proposed recognition of future excess tax benefits or tax deficiencies. The current GAAP reporting requirements regarding the computation and tracking of various share-based awards required on an award-by-award basis under ASC 718 can be a daunting task for any tax function. The FASB board has recognized the many complexities associated with the financial statement reporting of share-based awards and has put forth the exposure draft to provide financial statement reporting simplification.
Current GAAP Reporting Requirements
Under current GAAP pronouncements, when a share-based award is exercised upon vesting and the corresponding tax deduction exceeds the compensation costs recorded over the vesting period, the additional tax deduction—known as an excess tax benefit (“windfall”)—is recognized as additional paid-in capital. The cumulative excess tax benefits are computed and tracked on an award-by-award basis for future adjustments outside of the financial statements, which is known as an APIC Pool. Excess tax benefits are computed and tracked on an award-by-award basis within the APIC Pool in order to account for future tax deficiencies (“shortfalls”). Shortfalls occur when vested awards are exercised and the corresponding tax deduction is less than the compensation costs recorded over the vesting period for financial statement reporting purposes. To the extent a cumulative excess tax benefit or APIC Pool is available, future shortfalls are recorded as a reduction to additional paid-in capital until the accumulated APIC Pool is exhausted. Upon exhaustion of all available excess tax benefits all subsequent shortfalls are recognized within the income statement.
The board’s decision from an accounting for income tax reporting perspective would require all future excess tax benefits and tax deficiencies to be recognized directly within the income statement as an income tax expense or benefit, as opposed to a partial recognition of additional paid-in capital.
The financial statement reporting modification of all items presented within the exposure draft, in addition to the accounting for income taxes impact, will have significant implications from both a public and private company perspective. Have comments on the proposed draft? Comments may be provided via Taxonomy at www.fasb.org.
Now is the time to analyze your current share-based compensation award structure and gain a level of comfort regarding the future financial statement reporting impact of the proposed simplifications. True Partners Consulting’s experts in share-based compensation and accounting for income tax have the knowledge and expertise in this area to assist all taxpayers in evaluating their current share-based compensation award structure to recommend and implement practical approaches to follow the proposed rules on their future financial statements.