Continuing along on its accounting and reporting simplification efforts (see April 15, 2015 post), on March 30, 2016, the FASB issued ASU No. 2016-09 (ASU) Improvements to Employee Share-Based Payment Accounting. This ASU changes certain accounting requirements, as well as simplifies some of the underlying assumptions and calculations for the accounting measures. Certain provisions apply to all companies, with additional reliefs available only to nonpublic companies.
Key Simplifications for All Companies
Accounting for Income Taxes – All income tax effects associated with stock-based compensation will be recorded through the income statement, whereas currently “excess tax benefits” may be recognized as “additional paid-in capital” and by-pass the income statement entirely. Existing accounting rules require the complicated tracking of the “windfall pool” (aka “APIC pool”), which will no longer be needed under the new guidance. While this consistent treatment of income tax effects through the income statement simplifies both the theory and the mechanics, dissenters have highlighted the fact that this methodology will also introduce more volatility in the amounts reported for income tax expense. Additionally, “excess tax benefits” were formerly required to be classified as financing cash flows on the statement of cash flows, which required an alternate adjustment in cash flows from operating activities. These amounts will now be classified as any other income tax cash flows (in other words, no more special handling).
Forfeitures – Currently accruals of stock compensation costs are based on an estimate of the amount of awards that are expected to ultimately vest (in other words, not be forfeited). Under the new guidance, a company can make an entity-wide election to continue with this estimation method, or to account for forfeitures when they occur.
Other provisions in the ASU affect accounting for employee tax withholdings and how tax withholdings should be reported on the statement of cash flows.
Simplifications Available Only to Nonpublic Companies
Expected Term – With respect to the estimation of an expected term for purposes of fair value calculations, nonpublic companies can now adopt a “practical expedient”. For awards that include only service conditions and for some awards that also contain performance conditions, the expected term would be the midpoint between the requisite service period and the contractual term of the award.
Intrinsic Value – although nonpublic companies were always allowed to elect the intrinsic value method for liability awards, many nonpublic companies were not aware of this option. To change the accounting method to intrinsic value now would require that the company conclude that the change in accounting principle is preferable to the former accounting method, which would be virtually impossible to support. This new guidance allows nonpublic companies to make a one-time accounting policy election to use the intrinsic value method to account for liability awards.
Effective Date of the New Standards
Nonpublic companies must adopt these provisions beginning with December 31, 2018 year-ends, but all provisions may be adopted earlier. If early adoption is elected, all of the new provisions must be adopted in the same period. The new provisions have various transition requirements – retrospective, modified retrospective, prospective – as outlined in the ASU.
This post is intended to be an introduction to impending required and optional changes related to accounting for stock-based compensation, rather than an in-depth explanation or consideration of existing and modified GAAP in this area. Clearly, simplification will result from adoption; however, in some cases, certain accounting results may not seem favorable as compared to the past requirements, and users of the financial statements will need to be educated about their impact.