Changes may be coming to the accounting for share-based payments and the equity method of accounting. The Financial Accounting Standards Board (FASB) recently released two exposure drafts that include proposed changes to Investments, Equity Method and Joint Ventures (Topic 323), and Compensation-Stock Compensation (Topic 718). Both topics are agenda items on the FASB’s Simplification Initiative, which targets narrow scope improvements to current practice. Comments on the exposure draft, Simplifying the Equity Method of Accounting are due by August 4, 2015. Comments on the exposure draft, Improvements to Employee Share-Based Payment Accounting are due August 14, 2015.

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between the fair value on the acquisition date and
carrying value of the individual assets and liabilities
on the investee’s financial records, otherwise known
as the basis difference. The investee should also
identify and account for intangible assets identified
and equity method goodwill. Any differences between
the acquisition price and the investee’s carrying
value of individual assets and liabilities (i.e., the basis
difference) must be accounted for in subsequent
periods through the amortization or accretion through
income goodwill and would not be amortized unless a
qualifying entity has elected the accounting alternative
to amortized goodwill. These accounting requirements
can involve certain challenges, including determining
the fair value of the individual assets and liabilities, as
the investor may not have the access to the information
needed to perform the fair value assessment.
The proposed accounting standards update would
eliminate the requirement that the investor account
for the basis difference. Stakeholders have told the
FASB that accounting for basis difference adds cost
and complexity to the accounting process without
adding useful information to the investor’s financial
statements. Instead, entities would recognize the
equity method of investment at the acquisition amount
on the date of acquisition with subsequent adjustments
for the investor’s share of the equity in earnings of the
entity.
Changes may be coming to the accounting for share-
based payments and the equity method of accounting.
The Financial Accounting Standards Board (FASB)
recently released two exposure drafts that include
proposed changes to Investments, Equity Method
and Joint Ventures (Topic 323), and Compensation-
Stock Compensation (Topic 718).
Both topics are agenda items on the FASB’s
Simplification Initiative, which targets narrow
scope improvements to current practice. (For more
information about the Simplification Initiative and its
projects, see FASB Simplification Initiative Update.)
Comments on the exposure draft, Simplifying the
Equity Method of Accounting are due by August 4,
2015. Comments on the exposure draft, Improvements
to Employee Share-Based Payment Accounting are
due August 14, 2015.
Equity Method of Accounting
Current requirements for the accounting for equity
method investments require the equity method
investor to identify and account for the difference
between the acquisition price of the investment and
the investor’s proportionate share of the individual net
assets of the investee. This includes the difference
June 2015
Accounting Changes Proposed to Share-Based and Equity Methods of Accounting

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TheFASBisalsoproposingtoeliminatetherequirement
that investors retroactively apply the equity method
of accounting if a change in their ownership interest
triggers a requirement to follow the equity method of
accounting. The retrospective adoption requires the
investor to apply the equity method of accounting to
the investment, results of operations and equity for
all periods presented in which the investor held the
investment. This means the investor must determine
the fair value on the initial date an equity interest
was obtained in order to determine the original basis
difference in the initial period presented in the financial
statements. Then, the investor applies the equity
method to prior earnings, considering intercompany
profits and losses, amortization of the basis difference
and impairment testing. Retroactive adoption does
not produce enough of a benefit to financial statement
users to justify the time and effort required to apply
the accounting requirements, stakeholders told the
FASB.
After the initial public comment period, the FASB will
consider a final accounting standard update, including
the appropriate effective date of the changes as well
as if early adoption will be permitted.
Proposed Changes to Share-Based Payment
Accounting
The exposure draft on the accounting for share-based
payments comes out of conversations the FASB held
with the Private Company Council and about the Post-
Implementation Review Report on FASB Statement
No-123(R). Several items in current practice were
identified for consideration, including:
Accounting for Income Taxes – Upon exercise or
vesting, entities currently need to determine whether
the difference between the deduction for tax purposes
and the compensation cost recognized in financial
reporting results in an excess tax benefit or a tax
deficiency (i.e. the actual tax deduction is greater or
less than the recognized deferred tax asset). Excess
tax benefits are recognized in additional paid-in
capital and tax deficiencies are either recognized
as offsets to accumulated excess tax benefits within
additional paid-in-capital or as part of income if a tax
windfall pool does not exist. The proposed change
would require all excess tax benefits and deficiencies
to be recognized as income tax expense or benefits
in the entity’s income statement. Excess tax benefits
would be recognized regardless of whether the benefit
reduces payable taxes in the reporting period.
Classification of Excess Tax Benefits on the Statement
of Cash Flows – Entities are currently required to
separate excess tax benefits and classify them as
a financing activity. Under the proposed changes,
entities would not separately present excess tax
benefits within financing activities in the statement of
cash flows, therefore classifying them as an operating
activity.
Forfeitures – Entities must currently determine
compensation cost based on the number of awards
expected to vest, which requires an estimate of the
number of awards that are ultimately expected to be
forfeited. In the proposed changes, entities would
make an entity-wide accounting election to continue
estimating forfeitures or account for forfeitures when
they occur. The election would apply to awards with
only service conditions and those with performance
conditions that are deemed probable to occur at the
date of grant.
Minimum Statutory Tax Withholding Requirements
– Awards may qualify for equity classification if the
reporting entity cannot partially settle the award
in cash. However, if an entity makes a practice of
withholding an amount in excess of the employer’s

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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.
minimum statutory tax withholding requirement,
the excess withholding amount is considered a
cash settlement of the award, and the awards must
then be classified as liabilities in their entirety. The
proposal changes the threshold to qualify for equity
classification to permit a tax withholding up to the
employee’s maximum individual statutory tax rate in
the applicable jurisdiction(s).
Classification of Employee Taxes Paid on the
Statement of Cash Flows When Employers Withholds
Shares for Tax Withholding Purposes – The proposed
update would classify as a financing activity any cash
paid by an employer when directly withholding shares
for tax purposes.
Classification of Awards with Contingent Repurchase
Features – Entities currently assess contingent
repurchase features (such as an embedded put or
call feature) based on whether the contingent event is
within the employee’s control. If the contingent event is
within the employees control (such as a put right) and
it is possible the employee may avoid the risks and
rewards of equity ownership for a sufficient period of
time (generally six months), the award is classified as
a liability. The proposed update would require entities
to assess whether the contingent event is probable,
regardless of whether it’s outside the employee’s
control. If the event is not probable, the award would
not be required to be classified as a liability.
Practical Expedient for Expected Term – The expected
term is generally a significant input to determining
the fair value of an option. Thus, entities must have
a methodology for determining the estimated life for
options as of each valuation date. The proposed
changes would create a practical expedient for
private companies that allows the entity to estimate
the expected term for all awards with performance
or service conditions as the midpoint between the
requisite service period and the contractual term of
the award. If a performance condition is assessed
as not probable, the expected life is equal to the
contractual term.
Intrinsic Value – Private companies have the option
to measure all assets classified as liabilities at
intrinsic value rather than fair value. The proposal
would reiterate the election, allowing private entities
to make a one-time election to apply intrinsic value
measurements to all liability-classified awards.
For More Information
We will keep you informed about the comments and
changes that come out of the public comment periods
and any other developments related to share-based
and equity method accounting. If you have specific
questions, comments or concerns about the exposure
drafts, please share them with your MHM service
professional.