Hidden underneath the significant changes to revenue recognition and leases is the FASB’s update to accounting for share-based payments. And those changes – in an area often perceived to be as complicated as an NFL playbook – just made our jobs a little easier.
As part of its simplification initiative, the FASB addressed areas impacted by share-based payments, including areas concerning accounting for income taxes and classification in the statement of cash flows. Of course, some of us have tried to stay so far away from the share-based payments rules that we won’t know the difference. And who could blame us, right?
But the new rules make things easier, so let’s take a look at some of the changes to the playbook.
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Old Playbook |
New Playbook |
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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. – Excess tax benefits/deficiencies are defined as the difference between the entity’s tax deduction and book expense recognized. |
Accounting for Income Taxes: All excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement. Excess tax benefits and deficiencies are treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period or not.
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Classification of Excess Tax Benefitson the Statement of Cash Flows: Excess tax benefits are viewed as financing activities and thus presented as such in the statement of cash flows. |
Classification of Excess Tax Benefits on the Statement of Cash Flows: Excess tax benefits are presented as operating activities in the same way as other cash flows related to income taxes. |
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Forfeitures: Accruals of compensation cost are based on the number of awards that are expected to vest.
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Forfeitures: An entity-wide accounting policy election can be made to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. This election relates only to awards with service conditions and not those with performance conditions. |
In my opinion, the biggest benefit from the changes relates to the first item above. Under the old rules, companies were required to track what we refer to as the “APIC Pool.” If you ever dealt with the “APIC Pool” and some of the complexities that arose from it, you will be glad to see this one go.
Other anticipated changes relate to statutory withholding requirements and classification of employee taxes paid on the statements of cash flows when an employer withholds shares for tax-withholding purposes. We simply want to point out these changes right now so that you will be aware of them. We’ll leave the details for another day.
Finally, and with regard to nonpublic companies only, the new standard allows us to use the simplified method for calculating the expected term of an award. For those not familiar with the standard, the expected term is a key component in the valuation models for calculating the fair value of share-based compensation. I won’t go into the details concerning the simplified method in this blog, but trust me, it makes the calculation much easier.
So when is the new standard effective? And can you adopt it before the deadline? The standard is effective for annual reporting periods beginning after December 15, 2016 for public companies and nonpublic companies with annual reporting periods beginning after December 15, 2017. And yes, early adoption is permitted.
Remember, there is a great deal more to these standards than what is on the surface. Let us help you prep for the new standard. Contact me at 601.326.1321 or joe.green@hornellp.com.
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