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Employee Share-Based Payment Accounting

by Takashi Midorikawa
May 19, 2016

On March 30, FASB published ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC 718, Compensation–Stock Compensation.

The standard was designed to make it easier for employers to report the tax deductions for paying employees with stock options and restricted shares.  The updates include changes to:

Income Tax Accounting
The most significant change relates to how companies will report the tax consequences of share-based compensation. Under current GAAP, for each share-based payment, employers must determine whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes results in either an excess tax benefit or a tax deficiency.

IMPORTANT: All excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. Also, companies should recognize excess tax benefits whether or not the benefit reduces taxes payable in the current period.

Cash Flow
There are two changes with the statement of cash flows:

  1. Classification of excess tax benefits on the statement of cash flows is more straightforward under the new guidance. It calls for excess tax benefits to be classified as an operating activity with other income tax cash flows.
  2. Classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes should be classified as a financing activity.

Companies can either estimate the number of awards that are expected to vest, which is consistent with current standards, or account for forfeitures when they occur.

Practical Expedient for Private Companies
The standard provides a simplified formula for estimating the term for nonpublic entities that issue share-based payments based on a service or performance condition. For a private company that elect this practical expedient, the expected term of a share-based payment will generally be the midpoint between the requisite service period and the contractual term of the award, if vesting is dependent only upon a service condition.

Intrinsic Value
Private companies can elect a one-time switch from measuring all liability-classified awards at fair value to intrinsic value, without having to evaluate whether intrinsic value is preferable.

Adoption and Transition Periods

For public business entities: ASU 2016-09 is effective for annual periods beginning after 15 December 2016, and interim periods within those annual periods.

For all other entities: ASU 2016-09 is effective for annual periods beginning after 15 December 2017, and interim periods within annual periods beginning after 15 December 2018.

Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

Partner with Armanino

The new guidance now requires exercised or vested awards to be treated as discrete items in the reporting period in which they occur, there’s no going back—once numbers are reported, they cannot be changed. With no room for error, the biggest issue most companies will face is that their stock-based compensation information is not tracked as accurately as it should be.

Public and private companies need help from an expert that has the understanding of complex data sets, multiple tax management software solutions, and the current and updated shared-based accounting standards to ensure you’re calculating everything correctly.

Takashi Midorikawa is our resident ASC 718 and data mining expert. He can help ensure your corporate tax reporting is right the first time thanks to his expertise, equity and tax software know-hoe and tailored approach.

May 19, 2016

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