Easier Ways to Account for Share-Based Payments

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ASU 2016-09 Shared Based Payments

As part of FASB’s simplification initiative, in 2016 they issued Accounting Standards Update ASU 2016-09. The ASU creates easier ways to account for share-based payments for both private and public entities. It is intended to simplify both the accounting and presentation in the financial statements with regards to Share-Based Payments. Upon adoption, the amendments can significantly affect net income and earnings per share.

When

ASU 2016-09 is effective on the following dates:
Public companies – annual and interim periods beginning after 12/15/16
Private companies – annual period beginning after 12/15/17, interim periods after 12/15/18

Early Adoption

An entity can early adopt on an interim or annual period, but they must adopt all of the amendments in the beginning of the fiscal year of adoption. Many private, as well as public companies, have early adopted from various industries, including pharmaceutical and life services, retail and consumer, industrial products, technology, and banking and capital markets.

Financial Statement Impact

Under the old guidance, the fair value of the share-based payment awarded to an employee is generally recognized over the vesting period, and a deferred tax asset is recognized to the extent that the award is tax-deductible. The excess tax benefits and deficiencies are recognized in Additional Paid in Capital (APIC), and this net accumulation is referred to as the APIC pool.

ASU 2016-9 recognizes both benefits and deficiencies as an income tax benefit or expense in the income statement. Excess tax benefits are now recorded as an income tax cash flow on the operating section of the Statement of Cash Flows rather than broken out between financing (inflow) and operating (outflow). In addition, the requirement to defer tax windfalls (benefits) by decreasing current income tax payable is no longer needed. These changes to the recognition of benefits and deficiencies are applied prospectively.

The new guidance also allows entities to change the way they account for forfeitures. While estimating of forfeitures may still be needed depending on whether the share-based compensation was modified, entities can now choose to recognize the impact of forfeitures as they occur. The election of this new policy necessitates a modified retrospective approach and a cumulative adjustment to opening retained earnings.

Current GAAP New ASU 2016-09
Accounting for Income Taxes:

  • 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.
  • Excess tax benefits are not recognized until the deduction reduces taxes payable.
  • Both excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement.
  • Tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur.
 Classification of Excess Tax Benefits on the Statement of Cash Flows:

  • Excess tax benefits must be separated from other income tax cash flows and classified as a financing activity.
  • Excess tax benefits should be classified along with other income tax cash flows as an operating activity.
Forfeitures:

  • Accruals of compensation cost are based on the number of awards that are expected to vest.
  • An entity can make a policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur.
Minimum Statutory Tax Withholding Requirements:

  • One of the 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 threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions.
Classification of Employee Taxes Paid on the Statement of Cash Flows When an Employer Withholds Shares for Tax-Withholding Purposes:

  • There is no guidance on classification of cash paid by an employer to the taxing authorities when directly withholding shares for tax withholding purposes.
  • Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity.
Practical Expedient—Expected Term: Entities are required to estimate the period of time that an option will be outstanding. A nonpublic entity can make an accounting policy election to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that meet certain conditions.
Intrinsic Value: At initial adoption of Topic 718, Compensation—Stock Compensation, nonpublic entities were provided an option to measure all liability-classified awards at intrinsic value. Some nonpublic entities were not aware of that option. A nonpublic entity can make a one-time accounting policy election to switch from measuring all liability-classified awards at fair value to intrinsic value.

Please contact a member of Withum’s Technology Services Team at techtalk@withum.com or complete the following form for further questions or assistance.

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Zsia Rosmarin, CPA, MS, Partner Zsia Rosmarin, CPA, Partner
T (973) 898 9494
zrosmarin@withum.com
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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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