Improvements to employee share-based payment accounting
INSIGHT ARTICLE |
The Financial Accounting Standards Board (the Board) recently released Accounting Standards Update (ASU) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, to reduce the complexity of certain aspects of the accounting for employee share-based payment transactions. As a result of this ASU, changes applicable to all entities include:
- Minimum statutory withholding requirements – One of the previous requirements for an award to qualify for equity classification is that an entity cannot partially settle the award in cash in excess of the employer’s minimum statutory withholding requirements. The determination of employees’ minimum statuary withholding amount has been difficult for some entities. Under the ASU, the threshold to qualify for equity classification would permit withholding up to the maximum individual statutory tax rate in the applicable jurisdictions. Also, the ASU provides that cash paid by an employer when directly withholding shares for tax-withholding purposes would be classified as a financing activity on the statement of cash flows.
- Accounting for forfeitures – Currently, accruals of compensation cost are based on the number of awards that are expected to vest. The ASU would allow an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.
- Accounting for income taxes – Currently, excess tax benefits are recognized in additional paid-in capital. Tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement. Per the ASU, all excess tax benefits and tax deficiencies would be recognized as income tax expense or benefit in the income statement. An entity also would recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Further, excess tax benefits would not be separated from other income tax cash flows and thus would be classified along with other cash flows as an operating activity.
In addition, the ASU would allow a nonpublic entity to:
- Elect a practical expedient to estimate the expected term for all awards with only performance or service conditions. If an award only includes a service condition, a nonpublic entity could estimate the expected term as the midpoint between the vesting date and contractual term. If an award includes a performance condition, a nonpublic entity would first assess whether the performance condition is probable of occurring. If it is probable at the grant date that the performance condition will be met, a nonpublic entity could estimate the expected term as the mid-point between the requisite service period and the contractual term. If it is not probable at the grant date that the performance condition will be met, a nonpublic entity could estimate the expected term as (a) the contractual term if the service period is implied (that is, not explicitly stated) or (b) the midpoint between the requisite service period and the contractual term if the service period is explicitly stated.
- Make a one-time election to change from measuring liability-classified awards at fair value to measuring liability-classified awards at intrinsic value.
The Board decided not to finalize its proposed changes to the classification of awards with repurchase features. The Board indicated that it may address the accounting for repurchase features as part of another project regarding distinguishing liabilities from equity.
For public companies, the ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For private companies, the ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any organization in any interim or annual period. The Board decided to provide different methods of transition for the amendments. Reference should be made for the final ASU for details on the applicable transition method for each amendment.