FASB is About to Simplify Your Life

Have you heard? FASB just simplified the way companies account for stock-based compensation. That’s right, simplifying. We don’t often hear news like this, so it’s worth getting excited! Read on for details about how the FASB simplification initiative is about to make your (accounting) life easier. 

Changes in Accounting for Income Tax

 Currently excess tax benefits and deficiencies land in Additional Paid in Capital (APIC). With the new simplification, they will bypass the equity section of the balance sheet completely and fall into the income statement with the other income tax expenses.[1] This change also moves the excess tax benefits and deficiencies to the operating section of the the cash flow statement.

Changes in Statutory Tax-withholding Requirements

This change may alter your statutory tax rate (legally imposed rate). It will impact the financing section of the cash flow statement, which will now represent the entity’s cash outflow to reacquire shares.

Change in Account for Forfeitures

This is an easy one. Companies will now have the option to estimate the number of awards expected to vest (current GAAP) or to account for them as they occur.

Special Additions for Nonpublic Companies

FASB granted a few simplification amendments specifically for nonpublic companies and highlighted one that has been in effect but underutilized to date.

• Estimating Expected Term: Private companies can now apply “practical expedient to estimate expected term of compensation.” Awards may be estimated to have an expected term based on the contractual date or on the midpoint between the service period and contractual term. Now, your bank can determine the best estimate of the expected term, based on the type of award.

• Intrinsic Value Election: FASB has allowed this election for some time, but many companies simply have missed or not taken advantage of the option. It allows your bank to make a one-time election from fair value to intrinsic value for liability-based awards. Intrinsic value includes tangible and intangible (brand name, trademarks, copyrights) company assets. The advantage of using the intrinsic value is that you calculate the “real worth” of the shares rather than an investor analysis of company financials (fair value).

Implications of the FASB Changes for Banks

Banks stand to benefit from the FASB simplifications to stock-based compensation. For banks with significant amounts of share-based payments, the cost and complexity should decrease. 

Simplifying stock-based compensation gives you more time to focus on more complicated and strategic initiatives.

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[1] Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, FASB, March 2016