PROJECT UPDATE

Employee Share-Based Payment Accounting Improvements

Last updated on April 4, 2016. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)


The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective
*Due Process Documents
Decisions Reached at the Last Meeting
Tentative Board Decisions Reached to Date
*Next Steps
Board/Other Public Meeting Dates
Background Information
*Contact Information

Project Objective

The objective of the project is to reduce cost and complexity and improve the accounting for share-based payment awards issued to employees for public and private companies.

*Due Process Documents

On June 8, 2015, the Board issued proposed Accounting Standards Update, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The comment period ended on August 14, 2015. On March 31, 2016, The Board completed this project with the issuance of Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.

Decisions Reached at the Last Meeting (11/23/2015)

The Board completed redeliberations of its proposed Accounting Standards Update, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (the proposed Update), and gave the staff permission to draft a final Accounting Standards Update for vote by written ballot.

The Board affirmed proposed changes to the accounting for share-based payment awards issued to employees in the following areas:
  1. Accounting for income taxes upon vesting or settlement of awards
  2. Presentation of excess tax benefits on the statement of cash flows
  3. Accounting for forfeitures
  4. Minimum statutory withholding requirements
  5. Presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet minimum statutory withholding requirements
  6. Private company practical expedients
    1. Expected term
    2. Intrinsic value.
The Board did not affirm its proposed changes to the classification of awards with repurchase features.

Accounting for Income Taxes upon Vesting or Settlement of Awards

The Board affirmed its decision to require entities to recognize all excess tax benefits and all tax deficiencies as income tax expense or benefit in the income statement. The Board clarified that the tax effects of exercised or vested awards are discrete items in the reporting period in which they occur (that is, entities would not consider them in determining the annual estimated effective tax rate).

The Board also affirmed its decision to remove the requirement to delay recognition of an excess tax benefit until the tax benefit is realized.

Presentation of Excess Tax Benefits on the Statement of Cash Flows

The Board affirmed its decision to require that cash flows related to excess tax benefits be classified as an operating activity.

Accounting for Forfeitures

The Board affirmed its decision to allow an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (that is, an entity must estimate the number of awards that are expected to be forfeited) or account for forfeitures when they occur.

Minimum Statutory Withholding Requirements

The Board affirmed its decision to raise the threshold to qualify for equity classification to permit withholding up to the maximum individual statutory rate in the applicable jurisdiction.

Presentation of Employee Taxes Paid on the Statement of Cash Flows When an Employer Withholds Shares to Meet Minimum Statutory Withholding Requirements

The Board affirmed its decision to require that an employer classify the cash paid when directly withholding shares to meet minimum statutory withholding requirements as a financing activity on the statement of cash flows.

Classification of Awards with Repurchase Features

The Board decided not to finalize its proposal to require an entity to assess whether a contingent event that triggers a repurchase feature is probable of occurring, regardless of whether the contingent event is within or outside the employee’s control. The Board indicated that it may address the accounting for repurchase features as part of another project regarding distinguishing liabilities from equity.

Private Company Practical Expedients

Expected Term


The Board affirmed its decision to provide private companies with a practical expedient to estimate the expected term for all awards with performance or service conditions. However, the Board decided to modify the practical expedient as follows:
  1. If vesting is dependent upon only a service condition, an entity shall estimate the expected term as the midpoint between the requisite service period (that is, the period during which an employee must render service in order to vest in an award) and the contractual term of the award. This is consistent with the expedient included in the proposed Update.
  2. If vesting is dependent upon satisfying a performance condition, an entity first would determine whether the performance condition is probable of being achieved:
    1. If the entity concludes that the performance condition is probable of being achieved, then the entity shall estimate the expected term as the midpoint between the requisite service period and the contractual term. This is consistent with the expedient included in the proposed Update.
    2. If the entity concludes that the performance condition is not probable of being achieved, the entity shall estimate the expected term as (i) the contractual term if the service period is implied (that is, the service period is not explicitly stated but inferred based on the achievement of the performance condition at some undetermined point in the future); (ii) the midpoint between the requisite service period and the contractual term if the service period is explicitly stated. This represents a change from the expedient included in the proposed Update.
Intrinsic Value

The Board affirmed its decision to provide private companies with a one-time election to switch from measuring liability-classified awards at fair value to measuring liability-classified awards at intrinsic value.

Eliminating the Indefinite Deferral in Topic 718—Stock Compensation


To improve usability of the FASB Accounting Standards Codification®, the Board affirmed its decision to eliminate the indefinite deferral of certain requirements in Topic 718. This amendment will not result in change to current GAAP requirements; it only would remove guidance in the Codification that is indefinitely deferred.

Transition Method

The Board decided to provide different methods of transition for the amendments.

The Board decided that a modified retrospective transition method, with a cumulative-effect adjustment recognized in equity, would be used for the adoption of following amendments:

Accounting for Income Taxes upon Settlement of an Award (Applicable to All Entities)

The amendment to remove the requirement to delay recognition of an excess tax benefit until the tax benefit is realized.

Minimum Statutory Withholding Requirements (Applicable to All Entities)

The amendment to change the exception for liability classification when an employer uses a net-settlement feature to withhold shares to meet an employee’s minimum statutory withholding requirements. Under the modified retrospective transition method, the changes will be applied to outstanding liability awards at the date of adoption.

Accounting for Forfeitures (Applicable to All Entities)

The amendment allowing an entity an accounting policy election to either estimate the number of forfeitures or recognize forfeitures as they occur.

Intrinsic Value Election for All Liability-Classified Awards (Applicable to Nonpublic Entities Only)

The amendment to provide nonpublic entities with a one-time election to change the measurement of liability-classified awards from fair value to intrinsic value.

The Board decided to require a retrospective transition method for the following amendment:

Presentation of Employee Taxes Paid on the Statement of Cash Flows When an Employer Withholds Shares to Meet Minimum Statutory Withholding Requirements (Applicable to All Entities)

The amendment to classify cash paid when directly withholding shares to meet minimum statutory withholding requirements as a financing activity in the statement of cash flows.

The Board decided to provide an option to use either a prospective transition method or a retrospective transition method for the following amendment:

Presentation of Excess Tax Benefits on the Statement of Cash Flows (Applicable to All Entities)

The amendment to remove the requirement that employers present excess tax benefits as a cash inflow from financing activities and a cash outflow from operating activities. The Board previously proposed to require a retrospective transition method.

The Board decided to require a prospective transition method for the following amendments:

Accounting for Income Taxes upon Settlement of an Award (Applicable to All Entities)

The proposal that all excess tax benefits and tax deficiencies should be recognized in the income statement.

Expected Term (Applicable to Nonpublic Entities Only)

The proposal to provide nonpublic entities with a practical expedient for estimating the expected term of an award.
 
Disclosures in the Period of Adoption (Applicable to All Entities)

The Board decided that the disclosures about a change in accounting principle in paragraphs 250-10-50-1 through 50-3 will be required with one exception: entities would not be required to quantify the income statement effect of a change (direct and indirect) in the period of adoption.

Disclosures about Accounting for Forfeitures (Applicable to All Entities)

The Board decided to amend the disclosure requirements in paragraph 718-10-50-2(e) to include information about unvested awards rather than awards expected to vest. This amendment would only apply to entities that elect to account for forfeitures as they occur.

Effective Date

The Board decided that the amendments will be effective for public business entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. The amendments will be effective for all other entities for annual reporting 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.

Tentative Board Decisions Reached to Date

Tentative Board Decisions Reached to Date.

*Next Steps

The Board has issued final guidance related to this project.

Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

November 23, 2015 Board Meeting—The Board met to discuss feedback received in comment letters and instructed the staff to proceed to drafting a final Accounting Standards Update for vote by written ballot.
February 4, 2015 Board Meeting—The Board met to discuss methods of transition and disclosures related to previous Board decisions and directed the staff to draft a proposed Accounting Standards Update for vote by written ballot.
December 17, 2014 Board Meeting—The Board met to discuss potential practical expedients to simplify the accounting for share-based payment awards issued to employees for private companies..
December 10, 2014 Board Meeting—The Board met in a non-decision-making meeting to discuss potential practical expedients to simplify the accounting for share-based payment awards issued to employees for private companies.
October 8, 2014 Board Meeting—The Board added a project to its agenda to improve the accounting for employee share-based payment awards. The Board also added a research project on the accounting for nonemployee share-based payment awards.
September 10, 2014 Board Meeting—The Board met in a non-decision-making meeting to discuss potential improvements to the accounting for share-based payment awards.

Background Information

In August 2014, the FAF issued its PIR Report on Statement 123(R), Share-Based Payment. The PIR team concluded that Statement 123(R) achieved its expected benefits because (a) it resolved the issues that led to its issuance and (b) it generally provides users with useful information. The report also noted that it is more costly (difficult) for private entities to apply as compared with public business entities. Higher costs were attributed to both the complexity of the awards granted, which are often highly structured and contain multiple features, and the lack of internal expertise to comply with the requirements.

The FASB’s response letter to the PIR Report stated that the input from the PIR Report was consistent with the input the FASB previously received from stakeholders through outreach performed for the Simplification Initiative and pre-agenda research for the PCC.

The FASB staff began performing broad-based pre-agenda outreach at the direction of the PCC in Spring 2013 to identify what issues, if any, private companies encounter when applying the share-based payment guidance. Following the results of that outreach, in Spring 2014, the PCC asked the FASB staff to perform more targeted pre-agenda research related to a few alternatives for measuring share-based payment awards.

In addition, stakeholders reported to the staff ideas for improvements to accounting for share-based payment as part of the Board’s Simplification Initiative.

At the Board meeting on October 8, 2014, the Board formally added a project to its agenda to improve the accounting for employee share-based payment awards. The Board also decided to add a research project to improve the accounting for nonemployee share-based payment awards. The PCC Chairman asked four PCC members to serve as advisors to the project.

*Contact Information

Mark Barton
Practice Fellow
mfbarton@fasb.org

Dianora Aria De Marco
Postgraduate Technical Assistant
dademarco@fasb.org