Explaining FASB ASU 2016-09: Employee Share-Based Payment Accounting Improvements

FASB issued the Accounting Standards Update (ASU) No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in March 2016. The new update takes effect for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For private entities, the amendments take effect for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption will be permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption.

The Genesis of ASU 2016-09

The primary objective of the effort was to reduce cost and complexity, and improve the accounting for share-based payment awards issued to employees for public and private companies. The ASU highlights these provisions with two of those provisions specifically intended to simplify the accounting of practical expedient for expected term and intrinsic value for private companies.

We have highlighted the provisions here, noting pertinent changes. If you have any questions about these provisions or other elements of the ASU, please contact a member of our HORNE Banking team.  

Income Tax Effects

• Under the previous guidance, “windfalls” (tax benefits in excess of compensation cost) are recorded in equity and “shortfalls” are recorded in equity to the extent of previous windfalls. If previous windfalls are insufficient, shortfalls are recognized as a tax expense in the income statement.
• With the ASU, all tax effects of payments will be recognized in the income statement and windfall benefits will be reported as deferred tax assets, subject to normal valuation allowance considerations.

Classification of Excess Tax Benefits on the Statement of Cash Flows

• Under the previous guidance, excess tax benefits must be separated from other income tax cash flows and classified as a financing activity.
• With the ASU, excess tax benefits should be classified as an operating activity along with other income tax flows.
• This change can be applied either prospectively or retrospectively.

Classification of Employee Taxes Paid on the Statement of Cash Flows When an Employee Withholds Shares for Tax-Withholding

• There previously was no guidance on this issue. According to the ASU, if an employer pays any cash when allocating shares for tax withholding, that money is to be classified as a financing activity.

Minimum Statutory Tax Withholding Requirements

• Under the previous guidance, employers were permitted to withhold shares upon settlement of an award to satisfy the requirement to withhold a portion of the employee’s tax obligation arising from the exercises of the award. To qualify as equity, the share withheld was limited to the minimum statutory requirement.
• With the ASU, entities may withhold shares valued up to the maximum individual tax rate in the relevant jurisdiction without triggering liability classification of the award.
• This change should be applied retrospectively.

Forfeitures

• Under the previous guidance, the compensation expense for an employee who forfeited share-based payment awards by failing to meet service conditions would be adjusted to the actual number of vested awards.
• With the ASU, GAAP still requires entities to estimate forfeitures, but the employer can elect either to estimate the number of awards expected to vest or to account for forfeitures as they occur.
• If elected, changes will need to be applied using a modified retrospective approach with a cumulative effect adjustment recorded to beginning retained earnings.

The two final ASU provisions are in place specifically to alleviate some of the complexities of accounting for expected term and intrinsic value in non-public business entities.

Practical Expedient-Expected Term

• Under the previous guidance, entities were required to estimate the period of time that an option would be outstanding.
• With the ASU, the company can elect to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that meet certain conditions.

Intrinsic Value

• Under the previous guidance, nonpublic entities could opt to measure liability-classified awards at intrinsic value.
• With the ASU, 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.

It’s expected that the changes included in the ASU will produce measurable changes to net income and earnings per share. Businesses with significant share-based payment activities can expect to incur costs related to changing systems, processes, and controls. Whether your business is adopting the guidance early or at the determined effective periods, it’s important that you have a plan in place and the proper resources.

HORNE clients who have any questions about ASU 2016-09 should contact their engagement partner, and be sure to subscribe to the HORNE Banking blog for continued updates on this and other regulatory changes and news. 

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