Heads Up — FASB issues proposed ASU to simplify the accounting for share-based payments
On June 8, 2015, the FASB issued a proposed ASU on share-based payments as part of its simplification initiative (i.e., the Board’s effort to reduce the cost and complexity of current U.S. GAAP while maintaining or enhancing the usefulness of the related financial statement information). The proposed ASU simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, minimum statutory withholding requirements, classification in the statement of cash flows, and classification of awards with repurchase features. In addition, the proposed ASU contains two practical expedients for nonpublic entities under which such entities can use the simplified method to estimate the expected term of an award and make a one-time election to switch from fair value measurement to intrinsic value measurement for liability-classified awards.
Key Provisions of the Proposed ASU
Accounting for Income Taxes
Under current guidance, when a share-based payment award is granted to an employee, the fair value of the award is generally recognized over the vesting period and a corresponding deferred tax asset is recognized to the extent that it is tax-deductible. The tax deduction is generally based on the intrinsic value at the time of the exercise or vesting of the award, which results in a deduction that is greater (excess tax benefit) or less (tax deficiency) than the compensation cost recognized in the financial statements. All excess tax benefits are recognized in additional paid-in capital (APIC), and tax deficiencies are recognized either in the income tax provision or in APIC to the extent that there is a sufficient APIC pool.
Under the proposed ASU, an entity would recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. This change would eliminate the notion of the APIC pool and significantly reduce the complexity and cost of accounting for excess tax benefits and deficiencies. Further, the ASU would eliminate the requirement to defer recognition of an excess tax benefit until the benefit is realized.
Accounting for Forfeitures
The proposed ASU would allow entities to elect as an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered (current requirement) or to account for forfeitures as they occur. This accounting policy election only applies to service conditions; for performance conditions, an entity would continue to assess the probability that such conditions will be achieved.
Statutory Withholding Requirements
The proposed ASU would modify the current exception to liability classification when an employer uses a net-settlement feature to withhold shares to meet the employer’s minimum statutory tax withholding requirement. Currently, the exception only applies when no more than the number of shares necessary for the minimum statutory tax withholding requirement to be met is repurchased or withheld. The proposed ASU stipulates that the partial cash settlement of an award for statutory tax withholding purposes would not result, by itself, in liability classification of the award provided that the amount withheld for taxes does not exceed the employee’s maximum individual statutory tax rate in the relevant tax jurisdiction.
Classification of Awards With Repurchase Features
The accounting for repurchase features is complex and has resulted in diversity in practice. Although EITF Issue 00-23 was superseded by Statement 123(R) (codified in ASC 718), many continue to apply Issue 00-23’s provisions related to repurchase features by analogy. For instance, some believe it is appropriate to consider the probability of the occurrence of a contingent event that is within the control of an employee when the repurchase feature is in the form of a call right; however, others believe that probability should never be considered for a contingent repurchase feature (for both puts and calls) if the contingent event is within an employee’s control. Accordingly, the Board decided to eliminate diversity in practice and concluded that irrespective of who controls the contingent event, if it is not probable that the contingent event will occur before the employee bears the risks and rewards normally associated with equity share ownership for a reasonable period, the award should be classified as equity unless it meets other criteria that require liability classification. This proposed guidance would apply to both put and call rights.
Practical Expedients for Nonpublic Entities
Expected-Term Practical Expedient
The proposed ASU would allow nonpublic entities to use the simplified method to estimate the expected term for (1) awards with only service conditions and (2) awards with performance conditions when it is probable that the performance conditions (or both performance and service conditions) will be met. If it is not probable that an award’s performance conditions will be met, nonpublic entities applying the practical expedient would use the award’s contractual term as the estimate for the expected term.
The proposed ASU would require nonpublic entities to apply the simplified method prospectively to all awards that are measured at fair value after the adoption date.
Intrinsic Value Practical Expedient
The proposed ASU would allow nonpublic entities to make a one-time election to switch from fair value measurement to intrinsic value measurement, without demonstrating preferability, for share-based payment awards classified as liabilities.
Further, the proposed ASU contains a modified retrospective approach under which nonpublic entities making the one-time election would measure outstanding liability awards as of the adoption date at intrinsic value, with a cumulative-effect adjustment to retained earnings. However, the proposed ASU would not allow nonpublic entities to make this one-time election after the proposal’s effective date.
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