The FASB finalized changes to simplify stock compensation accounting. Key changes include requiring excess tax benefits and deficiencies to be recognized in income, allowing a policy election to account for forfeitures as they occur or estimate them, and permitting equity classification for net share settlements up to the maximum statutory tax rate. The changes aim to reduce complexity but may increase earnings volatility and effective tax rates. Early adoption is permitted for annual periods beginning after December 15, 2016 for public companies and after December 15, 2017 for others.
The second quarter of 2017 brought only two accounting standards and might represent the calm before the next storm. The Financial Accounting Standards Board (FASB) currently has 24 projects in various stages of development on its agenda and 10 research projects.
Major projects, including accounting updates to hedging, consolidation and the disclosure framework are still in the works, and research projects indicate that the FASB may be taking a closer look at accounting for intangibles, distinguishing liabilities from equity, inventory and cost of sales, subsequent accounting for goodwill and financial performance.
Attached Newsletter is an attempt to cover monthly issues relevant in the context of transactions - covers SEBI, Companies Act, Income Tax, Stamp duty and other regulatory changes
The second quarter of 2017 brought only two accounting standards and might represent the calm before the next storm. The Financial Accounting Standards Board (FASB) currently has 24 projects in various stages of development on its agenda and 10 research projects.
Major projects, including accounting updates to hedging, consolidation and the disclosure framework are still in the works, and research projects indicate that the FASB may be taking a closer look at accounting for intangibles, distinguishing liabilities from equity, inventory and cost of sales, subsequent accounting for goodwill and financial performance.
Attached Newsletter is an attempt to cover monthly issues relevant in the context of transactions - covers SEBI, Companies Act, Income Tax, Stamp duty and other regulatory changes
This white paper can help tax professionals understand the challenges of managing fixed assets involved in a technical termination and how to more efficiently and accurately handle the set-up, transfer, and management of those assets.
The time is now! An MACPA task force supports creation of private company standards board, says GAAP exceptions and modifications are essential.
This whitepaper was unanimously approved and adopted by the Board of Directors of the Maryland Association of CPAs on June 2, 2011.
After three months of study and debate, the MACPA task force concluded that the needs of private companies or nonpublic entites have not been considered by FASB in their standard setiing activities resulting in overly complex and costly standards that do not benefit the users of those financial statements.
This whitepaper present the research, analysis, and recommendations of the MACPA Task Force.
On February 25, 2016, the FASB issued the new standard, Leases (ASC 842). There are elements of the new standard that could impact almost all entities to some extent, although lessees will likely see the most significant changes. Lessees will need to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability.
The IASB issued its new standard, IFRS 16, Leases, earlier this year. There are significant areas of divergence between guidance applicable under US GAAP and that required by IFRS.
Due to the worldwide outbreak of COVID-19, businesses across industry sectors are likely to go through an extended, though finite, period of reduced revenues and continuing fixed costs. Most businesses are likely to suffer large costs/losses. See More : https://www2.deloitte.com/in/en.html
Our latest newsletter summarizes SEC developments in the last quarter, including certain items we have not previously reported in Week in Review. Highlights include remarks from SEC Chief Accountant Wesley Bricker on the adoption of significant new accounting standards and recent trends in SEC staff comments on non-GAAP measures.
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.
Brian Wurpts explains the Employee Plans Compliance Resolution System (EPCRS) in his article "Operational Failures & Forgiveness." Mychelle Holloway discusses "What's New in ESOP Administration" for 2009.
This white paper can help tax professionals understand the challenges of managing fixed assets involved in a technical termination and how to more efficiently and accurately handle the set-up, transfer, and management of those assets.
The time is now! An MACPA task force supports creation of private company standards board, says GAAP exceptions and modifications are essential.
This whitepaper was unanimously approved and adopted by the Board of Directors of the Maryland Association of CPAs on June 2, 2011.
After three months of study and debate, the MACPA task force concluded that the needs of private companies or nonpublic entites have not been considered by FASB in their standard setiing activities resulting in overly complex and costly standards that do not benefit the users of those financial statements.
This whitepaper present the research, analysis, and recommendations of the MACPA Task Force.
On February 25, 2016, the FASB issued the new standard, Leases (ASC 842). There are elements of the new standard that could impact almost all entities to some extent, although lessees will likely see the most significant changes. Lessees will need to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability.
The IASB issued its new standard, IFRS 16, Leases, earlier this year. There are significant areas of divergence between guidance applicable under US GAAP and that required by IFRS.
Due to the worldwide outbreak of COVID-19, businesses across industry sectors are likely to go through an extended, though finite, period of reduced revenues and continuing fixed costs. Most businesses are likely to suffer large costs/losses. See More : https://www2.deloitte.com/in/en.html
Our latest newsletter summarizes SEC developments in the last quarter, including certain items we have not previously reported in Week in Review. Highlights include remarks from SEC Chief Accountant Wesley Bricker on the adoption of significant new accounting standards and recent trends in SEC staff comments on non-GAAP measures.
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.
Brian Wurpts explains the Employee Plans Compliance Resolution System (EPCRS) in his article "Operational Failures & Forgiveness." Mychelle Holloway discusses "What's New in ESOP Administration" for 2009.
A Call to Action CPAs - Confronting the Lease Accounting Changes - iLease Man...jmeedzan
iLease Management LLC has been providing insightful research and recommended approaches into the proposed lease accounting changes for over two years. This presentation dives into not only how the proposed FASB and IASB lease accounting changes will impact organizations but shows how, at the functional level, what questions need to be considered in order to comply with these upcoming standard changes. We outline the functional areas like Corporate, Finance, Treasury, Human Resource and Technology. And given the resource limitations within most organizations, we show how the lease accounting changes will present “Opportunities for Assistance” for Certified Public Accountants (“CPAs”) that are looking for ways to add value to their client relationships.
This presentation explains how CPAs can position themselves to be proactive and provide technology and services that are of critical importance to their clients.
While we continue to await final standards for financial instruments and leasing as well as clarifications to revenue recognition, the third quarter marked another period of relatively narrow changes from the Financial Accounting Standards Board (FASB). The majority of the sixteen Accounting Standards Updates (ASUs) that have been finalized during 2015 relate to narrow scope projects identified by the FASB. ASUs issued in the third quarter include narrow scope changes to inventory, derivative instruments, business combinations and more widely applicable changes to benefit plan presentations and disclosures.
The deferral of the effective date for the implementation of Accounting Standards Codification (ASC) Topic 606 was also finalized. Activity at the Public Company Accounting Oversight Board (PCAOB) consisted of approval of the reorganization of PCAOB Auditing Standards and certain requests for comment and discussion papers.
The following provides a brief overview of these accounting developments during the third quarter. A more detailed discussion of these standards and other proposals is available from our archived webinar series.
What every tech company needs to know to prepare for the new revenue accounting standards. The new revenue recognition standard ASC 606 represents the most widespread change to revenue recognition rules in recent years. The transition from a rules-based approach for rev rec to a principle-based approach has significant implications for the entire organization. Software and other high tech companies must ready themselves for numerous impacts across systems, processes and policies as they work toward compliance.
Read this SAP Thought Leadership Paper to understand what new changes in regulations mean for your business and how you can become smarter about revenue recognition and lease accounting with SAP Lease Administration by Nakisa, a solution extension from SAP.
The third quarter was all about hedging and complex financial instruments. Two accounting standards updates will simplify accounting for entities and the users of their financial statements.
As today's not-for-profit organizations shift from being purely mission focused to operating more “like a business,” certain core principles and fundamentals apply to both. To wit, it is vital for audit committee members to stay ahead of relevant changes to legal and regulatory requirements in this challenging environment. Take a look.
The biggest accounting changes coming out of the third quarter affected not-for-profit organizations, but other projects received minor updates, too. In addition, several exposure drafts have been issued, including the expected exposure draft of targeted improvements to hedge accounting.
The new tax law that is informally referred to as the Tax Cuts and Jobs Act (TCJA) included many perks for businesses, but it also established new protocols for the recognition of gross income that may be detrimental. These new provisions may accelerate when income taxes are payable for certain businesses, as the recognition of gross income may be required earlier than would have been previously required for tax purposes.
1. Insights
from People and Organization
FASB finalizes changes to stock
compensation accounting
March 31, 2016
In brief
On March 30, 2016, the FASB issued Accounting Standards Update (‘ASU’) 2016-09, Improvements to
Employee Share-Based Payment Accounting, which makes a number of changes meant to simplify and
improve accounting for share-based payments. The FASB’s positions will have a major impact on some of
the more complex areas of stock compensation accounting.
In detail
Background
The FASB issued ASU 2016-09,
which prescribes a number of
changes to accounting for stock
compensation. Some of the
more significant amendments
address:
• accounting for income taxes
at settlement (a.k.a.,
windfalls, shortfalls, and the
APIC Pool)
• accounting for forfeitures
• net settlements to cover
withholding taxes
• expected term assumption
for non-public entities
FASB decided to take this
project on as a result of:
1. findings from the Financial
Accounting Foundation’s
(FAF) recently concluded
‘post-implementation review’
of FASB Statement No.
123(R), Share-Based
Payment,
2. pre-agenda research for the
FASB Private Company
Council, and
3. stakeholder concerns
communicated in response to
the Board’s ‘simplification
initiative’.
The key proposals
Accounting for income taxes
upon vesting or settlement of
awards
The amendments require all
excess tax benefits and tax
deficiencies be recognized
within the income statement.
These tax effects will be treated
as 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).
This will replace the current
guidance which provides for
recognition in APIC (equity) of
tax benefits in excess of
compensation cost (windfalls);
eliminates the need to maintain
an ‘APIC or windfall pool’; and
removes the requirement to
delay recognizing a windfall
until it reduced current taxes
payable.
Along with simplifying the
accounting and eliminating
excess recordkeeping, the Board
believes that the tax effect of
share-based payment
transactions should be reflected
in operating results.
Observation
This element of the package of
amendments proved the most
contentious during
deliberations. The Board
received many comment letters
opposing this rule change.
Some favored retaining existing
rules rather than the new
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2. Insights
approach. Others proposed
eliminating the APIC pool concept,
but fully recognizing all tax
excesses/deficiencies directly in APIC.
The Board considered these
comments, but chose to retain the
approach requiring
excesses/deficiencies be recognized in
income. Although some Board
members supported the ‘APIC
alternative’, the Board decided that
the income tax consequences of share-
based awards should be recognized in
earnings along with all other income
taxes.
The Board also considered aligning
with IFRS accounting, but indicated
that convergence would require a
significant change to the model that
would be outside the scope of a
simplification project.
The changes in accounting for
windfalls and shortfalls will be applied
prospectively to all excess tax benefits
and tax deficiencies occurring from
settlements after the date of adoption.
APIC pools will no longer be needed
and will not impact accounting after
the adoption date.
Observation
While tracking of the APIC pool will
no longer be required after adoption,
no adjustment to amounts previously
recognized in APIC are necessary.
Under the amendments, excess tax
benefits will be classified as operating
inflows in the cash flow statement —
consistent with other cash flows
related to income taxes. Windfalls are
classified as financing activities today.
Companies can elect to apply the
income tax cash flow classification
amendment either prospectively or
retrospectively to all periods
presented.
With respect to the elimination of the
requirement to delay recognition of an
excess tax benefit until the tax benefit
is realized, and for any valuation
allowance recognized for deferred tax
assets as a result of the transition
guidance, ‘modified retrospective’
transition should be applied. This
approach will result in a cumulative-
effect adjustment applied to opening
retained earnings in the year of
adoption.
Observation
Elimination of the APIC pool and
recognition of all tax benefit excesses
and deficiencies in income will likely
simplify the bookkeeping and
recordkeeping for companies, but
may require changes in
administrative systems and
processes.
We also expect the changes will result
in more volatile net earnings — with
some companies that are more
extensive ‘users’ of equity
compensation or with more volatile
share prices to be affected more
significantly.
Similarly, effective tax rates will be
subject to more variability. Under
today’s model, stock compensation
generally doesn’t impact the effective
tax rate (since any difference between
compensation cost and ultimate
deduction is reflected in APIC).
Under the amendment, because these
tax benefit excesses and deficiencies
are reflected in tax expense, the
effective rate in the period of
deduction will be impacted.
When budgeting and forecasting, it
may be difficult for companies to
incorporate these expected effects, in
part because they are based on future
share price movements, and in part
because they may be contingent on
employee option exercise behavior
and timing.
Finally, we expect that most
companies with stock-based
compensation will show additional
dilutive effects in EPS calculations
because there will no longer be excess
tax benefits recognized in APIC to be
included in assumed proceeds from
applying the treasury stock method
when computing diluted EPS.
Net settlement for tax withholding
Current guidance requires liability
classification if more than the
minimum statutory requirement is
withheld in a net settlement. Applying
this requirement can be complex.
The amendment permits equity
classification provided any net
settlement to cover tax withholding
does not exceed the maximum
individual statutory tax rate in a given
jurisdiction.
Transition will be modified
retrospective, with a cumulative-effect
adjustment in opening retained
earnings for any outstanding liability
awards currently classified as
liabilities that qualify for equity
classification under the amendments.
Observation
This change will likely be a welcome
relief for employers. Determining the
appropriate minimum statutory
withholding requirement today can
be time-consuming and complex,
particularly for companies operating
in many jurisdictions in the U.S. or
around the globe. Under the new
regime, it will likely prove far simpler
to determine the maximum individual
statutory tax rates in these
jurisdictions.
What may be more complex is
developing a consistent process and
method to use in net settlements
under the amendments. Some
employers may not want to withhold
the maximum amount for every
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3. Insights
employee (since many likely are not
subject to those maximum rates), and
use of a higher rate will result in a
greater use of cash by the employer.
Yet developing a consistent and fair
approach to determine the net
settlement on an employee-basis
could be a challenge.
Private companies in particular may
find the new rules an especially
welcome change. Since net
settlements today very often do not
cover an employee’s full tax
responsibility, those individuals need
to come out of pocket to cover taxes.
As the underlying shares are illiquid,
this can be a cash flow challenge for
the employee. Under the
amendments, the company could
withhold the maximum statutory tax
rate in the applicable jurisdictions
(for example, federal, state and
local), even if that maximum rate is
more than the highest rate paid by
the specific award grantee.
Employers will continue to be subject
to limitations on withholding under
the relevant tax rules.
Further, most private companies
continue to favor stock options over
restricted stock or RSUs (even while
most public companies have
markedly shifted away from
extensive use of stock options).
Avoiding restricted stock or RSUs is
due, in part, to the cash burden that
would be faced by employees at
vesting under the current rules, since
their actual tax rate may be higher
than the statutory minimum
withholding rate. As the amendments
can eliminate this concern, private
companies may now consider these
alternatives to stock options to be
more attractive.
The Board also decided the cash paid
to a taxing authority in connection
with a net settlement should be
presented as a financing activity on
the cash flow statement. This
amendment should be applied
retrospectively.
Observation
There is diversity in practice today
regarding classification of these cash
payments, with some reflecting as
operating cash outflows and some as
financing outflows. We believe there
is conceptual support for both
approaches. The amendment will
eliminate this practice diversity and
prescribe a single approach for all.
Accounting for forfeitures
Estimating forfeitures can be complex
and costly. The amendments provide
for an accounting policy election to
either 1) continue to estimate
forfeitures, or 2) account for
forfeitures as they occur.
Although the FASB considered
allowing a policy election on a grant
by grant basis, it decided to move
forward with an entity level policy
election to maintain comparability
and potentially reduce costs and
complexity.
The transition guidance is a modified
retrospective application with a
cumulative-effect adjustment applied
to opening retained earnings.
Observation
Companies should carefully consider
this policy election and not miss this
opportunity, since it will establish
their policy. Any change in the future
(that is, after adoption of the
amendments) would be considered a
change in accounting principle, with
all the accompanying considerations
(e.g., preferability assessment,
retrospective application, etc.).
Companies should also consider the
calculations necessary to recognize
the cumulative adjustment on
transition, and any coordination with
third party stock plan administration
vendors to make the necessary
system adjustments.
If the election is made to account for
forfeitures as they occur, employers
will still need to estimate forfeitures
when reflecting purchase price
allocations associated with stock
awards in an acquisition. The ASU
amended ASC 805, Business
Combinations, to clarify that
forfeiture estimates must still be
made to assess the portion of
replacement awards attributable to
pre-combination service. However,
post-combination expense will be
based on the company’s policy.
Expected Term
In determining stock option value
under today’s rules, companies must
estimate the expected term (i.e., the
time an option is expected to be
outstanding until exercise), unless it is
‘plain vanilla’ and qualifies for the
simplified method as allowed by the
SEC. As this practical expedient is
SEC guidance, it doesn’t apply to
private companies.
The amendments allow private
companies to make an entity-wide
accounting policy election to estimate
the expected term using a similar
(though not the same) simplified
method for most stock options. The
transition guidance should be applied
prospectively for all awards measured
at fair value after the effective date.
Observation
In our experience, some private
companies may already use an
approach similar to the simplified
method in developing expected term
when sufficient historical experience
is unavailable. As the amendments
explicitly allow for its use, more
private companies may consider
using this practical expedient.
The amendment includes additional
considerations in developing expected
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4. Insights
term under this practical expedient for
awards with performance conditions.
Classification of Awards with
Repurchase Features
The Board had originally proposed to
clarify and align the classification
guidance with repurchase features
(e.g., put or call rights) that are
contingent on an event, such as an
IPO or upon an employee’s
termination. The Board decided not to
amend the guidance because feedback
from stakeholders indicated it would
not reduce complexity in classifying
awards as equity or liability. A more
comprehensive approach to amending
the guidance for repurchase features
may be considered as part of the
Board’s existing Liabilities and Equity
– Targeted Improvements project.
Effective Date
For public companies, the
amendments are effective for annual
periods beginning after December 15,
2016 and interim periods within those
annual periods. For all other
companies, the amendments are
effective for annual periods beginning
after December 15, 2017 and interim
periods within annual periods
beginning after December 15, 2018.
Early adoption is permitted but
requires all elements of the
amendments to be adopted at once
rather than piecemeal.
The takeaway
The simplification of stock
compensation accounting is here.
While the changes may make the
accounting less costly and complex,
there are important policy and
strategy decisions to be made by
employers. Various analyses and
calculations could be needed to apply
the ‘modified retrospective’
cumulative catch-up transition
adjustments.
Companies with stock compensation
programs should review the
amendments and start thinking
through the implications.
Companies should start thinking
about whether early adoption would
be beneficial, or whether adopting at a
later effective date would help to
provide more time to prepare for
effective implementation of the
changes.
Let’s talk
Our HR Accounting Advisory team is happy to talk further about the details of the changes, and help you evaluate the
alternatives and the implications for your company.
Don’t hesitate to reach out to one of the authors:
Ken Stoler, Los Angeles
(213) 270-8933
ken.stoler@pwc.com
Teresa Yannacone, Philadelphia
(267) 330-1377
teresa.yannacone@pwc.com
or your regional People and Organization professional:
US Practice Leader
Scott Olsen, New York
(646) 471-0651
scott.n.olsen@pwc.com
Jack Abraham, Chicago
(312) 298-2164
jack.abraham@pwc.com
Carrie Duarte, Los Angeles
(213) 356-6396
carrie.duarte@pwc.com
Jim Dell, San Francisco
(415) 498-6090
jim.dell@pwc.com
Charlie Yovino, Atlanta
(678) 419-1330
charles.yovino@pwc.com
Brandon Yerre, Dallas
(214) 999-1406
brandon.w.yerre@pwc.com
Ed Donovan, New York Metro
(646) 471-8855
ed.donovan@pwc.com
Scott Pollak, San Jose
(408) 817-7446
scott.pollack@Saratoga.pwc.com
Craig O'Donnell, Boston
(617) 530-5400
craig.odonnell@pwc.com
Todd Hoffman, Houston
(713) 356-8440
todd.hoffman@pwc.com
Bruce Clouser, Philadelphia
(267) 330-3194
bruce.e.clouser@pwc.com
Nik Shah, Washington Metro
(703) 918-1208
nik.shah@pwc.com
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