FASB issues standard to simplify share-based payment accounting

By Ken Tysiac

FASB issued a new standard Wednesday that is designed to make accounting for share-based payment transactions less complex for public and private companies.

Accounting Standards Update (ASU) No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, affects all organizations that issue share-based payment awards to their employees.

Areas of accounting for share-based payments that the standard was designed to simplify include:

  • The income tax consequences.
  • Classification of awards as either equity or liabilities.
  • Classification on the statement of cash flows.

Momentum for the standard was created after the Private Company Council (PCC) identified accounting for employee share-based payments as an area of concern in private company accounting. The PCC worked with FASB to discuss and analyze the issues that private companies have encountered in this area.

In addition to rules that affect all organizations that issue share-based payments, the ASU contains provisions that simplify two areas specific to private companies:

  • Practical expedient for expected term: In lieu of estimating the period of time that a share-based award will be outstanding, private companies will be able to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics.
  • Intrinsic value: Private companies will be able to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. Previously, private companies were provided an option to measure all liability-classified awards at intrinsic value at initial adoption of Topic 718, but some private companies were not aware of that option.

FASB Chairman Russell Golden said in a news release that both private and public company stakeholders identified some aspects of accounting for employee share-based awards that were unnecessarily complex.

“Based on input from those stakeholders—including the Private Company Council—the FASB has issued a standard that we believe will simplify the accounting while maintaining the usefulness of information provided to investors,” Golden said.

For public companies, the standard takes effect for annual periods beginning after Dec. 15, 2016, and interim periods within those annual periods. For private companies, the amendments take effect for annual periods beginning after Dec. 15, 2017, and interim periods within annual periods beginning after Dec. 15, 2018. Early adoption is permitted for any organization in any interim or annual period.

Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.

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