The Financial Accounting Standards Board (FASB) recently released Accounting Standards Update (ASU) 2016-09, Compensation (Topic 718): Improvements to Employee Share-Based Accounting. The ASU, which is a result, in part, of the post-implementation review of FASB Statement No. 123(R) Share Based Payment, is also part of the FASB’s continuing simplification project. The amendments are intended to simplify certain aspects of the accounting for share-based payments, including: Accounting for income taxes upon settlement of the award; Presentation of excess tax benefits; Accounting for forfeitures; and Withholding requirements and presentation of income taxes. Additionally, the amendments provide for certain practical expedients for non-public entities.

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Changes from the Proposed ASU
Changes to share-based accounting became part of
the Simplification Initiative project list in 2014, and the
FASB released a proposed ASU in June of 2015. The
final ASU is similar in most respects to the Exposure
Draft, however, after receiving comment letters and
other feedback, the FASB decided not to include its
proposed changes to the classification of awards
with repurchase features. The June 2015 Exposure
Draft included suggested amendments providing that
entities should include an assessment of whether
contingent repurchase features, such as an embedded
put or call feature, have a probable occurrence when
evaluating the impact of the contingent feature on the
classification of the awards as equity or as a liability.
The Exposure Draft included amendments that would
have allowed equity classification if the contingent
event is not probable. This would have changed the
current guidance, which requires the reporting entity
to assess the award classification based on whether
the contingent event is within the employee’s control.
Accounting for Income Taxes Upon Vesting
or Settlement of Awards
The amount of compensation expense recognized for
financial reporting purposes and the amount reported
for income tax reporting purposes often differ for
share-based payment awards. As a result, a temporary
tax difference is recognized as the compensation
expense is recognized for financial reporting
purposes, which is ultimately settled once the award
itself is settled. If the actual tax benefit exceeds the
deferred tax asset recorded in the financial statements
The Financial Accounting Standards Board (FASB)
recently released Accounting Standards Update (ASU)
2016-09, Compensation (Topic 718): Improvements to
Employee Share-Based Accounting. The ASU, which
is a result, in part, of the post-implementation review
of FASB Statement No. 123(R) Share Based Payment,
is also part of the FASB’s continuing simplification
project. The amendments are intended to simplify
certain aspects of the accounting for share-based
payments, including:
• Accounting for income taxes upon settlement of
the award;
• Presentation of excess tax benefits;
• Accounting for forfeitures; and
• Withholding requirements and presentation of
income taxes.
Additionally, the amendments provide for certain
practical expedients for non-public entities.
April 2016
Changes Made to Share-Based Payment Accounting

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(Excess Tax Benefit), the excess is recorded directly
to equity. However, if the actual tax benefit is less
than the deferred tax asset recorded in the financial
statements (Tax Shortfall), the accounting can be
more complex. A Tax Shortfall is recorded directly
to equity only to the extent that a Tax Windfall Pool
exists. A Tax Windfall Pool represents the cumulative
total of previously recognized Tax Benefits in excess
of previously recognized Tax Shortfalls. If a Tax
Windfall Pool has not been established (previously
recognized Tax Shortfalls exceed Tax Benefits), the
Tax Shortfall should be recorded as a component
of income tax expense rather than directly to equity.
These accounting requirements require an entity to
separately track all previously recognized Tax Benefits
and Shortfalls to determine the cumulative amounts.
The amendments to ASC 718 will require all Tax
Benefits and Tax Shortfalls to be recognized directly
to income, as a component of the income tax
expense, regardless of whether tax benefits affect
payable taxes in the reporting period. This will result
in less reporting complexity as entities will no longer
be required to track the Tax Windfall Pool, but the
amendment will also result in more volatility to the
reported income tax expense.
Additionally, existing guidance requires an entity
to delay the recognition of a Tax Shortfall until the
date it reduces the taxes payable on the respective
tax return, including, reduction of taxable income
or carryback to prior tax returns in a period without
taxable income. The amendments change the
recognition requirements such that all Tax Shortfalls
should be recognized on the date the award is settled.
If the settlement results in an additional deferred tax
asset, the deferred tax asset should be evaluated in
a similar fashion with all existing deferred tax assets.
The amendments will also have an impact on the
calculation of diluted shares when determining
earnings per share (EPS). As the Excess Tax Benefit
will no longer be recorded directly to equity, the tax
benefit will no longer affect the assumed proceeds
when calculating EPS under the treasury stock
method. This will result in a more dilutive impact from
existing share based payment awards.
Presentation of Excess Tax Benefits on the
Statement of Cash Flows
In the statement of cash flows, entities will account
for Excess Tax Benefits that result from the vesting
or settlement of awards as an operating activity. ASC
718 currently requires entities to classify Excess Tax
Benefits as a financing activity as well as an outflow
from operating activities.
Forfeitures
The amendments allow entities to make an enterprise-
wide accounting policy election to estimate the number
of service condition-based awards expected to forfeit
(which is the requirement in current practice) or they
can choose to account for forfeitures as they occur.
Minimum Statutory Tax Withholding Require-
ments & Presentation of Taxes
The withholding of income taxes from awards upon
exercise has traditionally been viewed as a method of
cash settlement if the amount withheld by the entity
on the employee’s behalf is greater than the minimum
statutory requirement. For example, a stock option
plan may allow for the tax liability to the employee
to be withheld in the form of shares that would have
been issued to the employee. The fair value of those
shares withheld is then remitted to the taxing authority
in cash to meet the tax liability of the employee. As
a result, if a reporting entity had established a policy
of withholding amounts in excess of the statutory
minimum amounts, the outstanding awards were

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
classified as liability awards. The amendments retain
the concept of cash settlement of the award when
the employer withholds income taxes, however, the
threshold for triggering liability accounting has been
raised from the statutory minimum for the employee to
the statutory maximum for the employee or employee
group.
The amendments to the ASU also require entities to
classify cash paid from the withholding of shares to
meet minimum statutory withholding requirements as
financing activities.
Private Company Practical Expedients
The amendments also provided two practical
expedients for non-public entities (as determined
by the definition of a non-public entity in ASC 718).
Qualifying entities can elect to estimate the expected
term of option (or similar) service- or performance-
based awards, using a convention that represents
the midway point between the service period and the
contractual expiration of the award (as stated in the
contract). The expected life is a significant input when
determining the estimated fair value of an award. If the
non-public entity determines a performance condition
is not likely to occur, then the expected life of the asset
is equal to its contractual term.
Upon adoption, non-public entities can also make a
one-time election to measure all awards classified as
liabilities at intrinsic value rather than fair value.
Transition Method and Effective Date
Public business entities will be required to adopt the
amendments for annual and interim periods beginning
after December 15, 2016. All other entities will be
required to adopt the amendments for annual periods
beginning after December 15, 2017, and interim
periods beginning after December 15, 2018. Early
adoption is permitted as of the beginning of the year
of adoption, however, all provisions of the ASU must
be adopted at the same date.
The amendments requiring the recognition of income
tax benefits and shortfalls in the tax provision should
be applied prospectively. Non-public entities electing
to account for awards at intrinsic value should also be
applied prospectively.
Entitiesshouldusethemodifiedretrospectivetransition
method for adopting the amendments related to timing
of the recording of income tax benefits at settlement of
an award (i.e. those deferred and not recognized until
they impact the taxes payable), statutory withholding
requirements and forfeiture estimates.
Modifications to the presentation of employee taxes
paid in the statement of cash flow when shares
are withheld to meet statutory tax withholding
requirements will require a retrospective transition.
Entities will be able to elect either a prospective or
a retrospective transition to presenting excess tax
benefits in the statement of cash flows.
Disclosures will be required during the period of
adoption, but entities will not have to quantify the
effect of the change during the period of adoption.
For More Information
If you have specific comments, questions or concerns,
please share them with Mike Loritz of MHM’s
Professional Standards Group. Mike can be reached
at mloritz@cbiz.com or 816.945.5611.