FASB Flash Report - December 2015

December 2015

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Summary

On November 23, 2015, the Financial Accounting Standards Board (“FASB” or “Board”) voted to affirm several changes intended to simplify and improve the accounting for share-based payments and directed its staff to begin drafting a final Accounting Standards Updates (“ASU”) for vote by written ballot.

The final ASU is expected to be released in 2016 with the changes effective in 2017 for calendar year public entities and 2018 for calendar year nonpublic entities, with early adoption permitted.
The decisions affirmed by the Board represent significant steps toward simplifying and improving certain pretax and tax accounting requirements of the current model. They will have a broad-reaching effect across all industries and will reduce the cost of complying with the standard while maintaining or improving the usefulness of information provided to users of financial statements.
 

Details

The FASB issued an Exposure Draft (“ED”) on June 8, 2015, containing a proposed ASU to amend ASC Topic 718, Compensation – Stock Compensation (refer to this BDO Flash Report from June 2015 for a summary of the ED’s proposals). The Board received 69 comment letters from various stakeholders who in large part supported the Board’s initiative to simplify the standard and agreed that the proposals would simplify the standard in a meaningful way. However, many respondents disagreed with the proposal to recognize all income tax effects in income tax expense.

The ED has nine proposals and the Board affirmed all but one related to the classification of an award with repurchase features (i.e., puts and calls).

The following decisions apply to all entities:

1.  Accounting for Income Taxes upon Vesting or Settlement of Share-Based Awards

The FASB affirmed two significant tax accounting amendments:

(a) To require recognizing in income tax expense the tax benefit on the tax return that exceeds the tax benefit recognized in the financial statements and tax deficiencies, i.e., the excess of tax benefit recognized in earnings over the tax benefit actually realized on the tax return, and

(b) To require recognizing, through income tax expense, net operating losses (“NOLs”) stemming from excess tax benefits even when they do not reduce income tax payable in the current period.
The changes to account for the excess tax benefits (including NOLs) and tax deficiencies through income tax expense will be on a prospective basis.

NOLs existing on the effective date which are currently tracked off balance sheet would be recorded on the balance sheet, through a cumulative adjustment to equity as of the beginning of the year in which the guidance is adopted (modified retrospective), and assessed for realization to determine whether a valuation allowance is required.

The Board also agreed to amend ASC subtopic 740-270 which contains the interim period tax accounting guidance and specify that excess tax benefits and tax deficiencies would be accounted for in the interim period in which they arise. Discrete recognition of tax effects from windfalls and shortfalls would avoid the need to forecast and recognize such effects through an estimate of the annual effective tax rate from continuing operations.    

The FASB’s tax accounting decisions will eliminate the need to maintain and track an APIC pool. 

2.  Cash Flow Presentation of Excess Tax Benefits

The FASB affirmed an amendment to require excess tax benefits to be shown within operating activities. This resolution is consistent with the decision to eliminate equity accounting for all tax effects related to share-based awards and instead require recognition of the tax effects in income tax expense.
The change in the statement of cash flows classification would be applied either prospectively or retrospectively for all prior periods presented in the financial statements, at the option of the entity.

3.  Accounting for Share Award Forfeitures

The FASB affirmed an amendment to allow an entity-wide accounting policy election to either estimate forfeitures (current GAAP) or account for forfeitures as they occur.

This change would be recognized through a cumulative-effect adjustment to equity as of the beginning of the annual period in which the guidance is effective (modified retrospective).
The accounting policy election would only apply to awards with service conditions; awards with performance conditions would still be assessed at each reporting date to determine whether it is probable that the performance condition will be achieved.

An accounting policy election to account for forfeitures when they occur would result in reversing compensation costs previously recognized when an award is forfeited before the completion of the requisite service period (the reversal is recognized in the period the award is forfeited). Dividends paid while an option is outstanding which do not have to be paid back upon forfeiture would be reclassified to compensation cost in the period in which the forfeiture occurs.

4.  Minimum Statutory Tax Withholding Requirements

The classification of a share-based payment is significant because it determines whether the award’s grant-date fair value is fixed (equity classification) or is subject to periodic fair value adjustments recognized through earnings (liability classification).

The FASB affirmed an amendment to allow a partial cash-settlement for withholding tax up to the maximum individual statutory withholding tax rate (in the applicable jurisdictions) without requiring liability classification. This change in accounting would be applied through a cumulative-effect adjustment to equity as of the beginning of the annual period in which the guidance is effective (modified retrospective).

A statutory obligation to withhold tax on an employee’s behalf would not cause liability classification if the amount withheld does not exceed the employee’s maximum individual statutory rate in a given jurisdiction. A single “maximum” statutory rate for a given jurisdiction would need to be determined and not a “maximum” rate per individual in a given jurisdiction. The maximum individual statutory tax rates would be based on rates required by the relevant tax authority (or authorities, for example, federal, state, and local) and provided in tax law, regulations, or the authority’s administrative practice.

5.  Cash Flow Presentation of Employee Payroll Taxes Paid When Shares are Withheld to Pay Minimum Statutory Withholding Tax

The FASB affirmed an amendment to require that tax paid with shares withheld by the entity to cover the cash equivalent of the employee’s tax be classified as a financing activity rather than an operating activity. That is, the withholding represents an in-substance treasury stock transaction.

Under current accounting, a liability for employee payroll taxes on employee stock compensation is generally considered an operating expense included in cash flows from operations. The change in the statement of cash flows classification would be applied retrospectively for all prior periods presented in the financial statements, at the election of the entity.

The Board’s decision to require presentation of an employee’s tax paid by the entity with shares withheld from the employee only covers the portion of taxes effectively paid for with shares. This presentation does not extend to any other portion of payroll taxes which the entity must withhold and remit to the relevant taxing authority.
 

The following two decisions apply to nonpublic entities only:

6.  Expected Term of Awards – Practical Expedient

The FASB affirmed an amendment, with modification, to provide nonpublic companies with a practical expedient to estimate the expected term for all awards with performance or service conditions. The practical expedient would not apply to awards with a market condition.
 
The amendment would permit nonpublic companies to elect a practical expedient to estimate the expected term for all awards having service or performance conditions. The expected term would be the midpoint between the vesting date and the contractual term for qualifying awards with a service condition.
If vesting is conditioned upon satisfying a performance condition, an assessment would be made at grant date to determine whether it is probable that the performance condition would be achieved. If it is probable, the expected term would be the midpoint between the requisite service period and the contractual term.

If achieving the performance condition is not considered probable, the expected term would be the contractual term if the service period is implied. When the service period is explicitly stated, the midpoint between the requisite service period and the contractual term would be the expected term. The FASB decided to modify this proposal based on feedback received from respondents and to permit consideration of the service period.   

This practical expedient policy would be applied on a prospective basis.

7.  Intrinsic Value Election for Liability Classified Awards

The FASB affirmed an amendment to provide a one-time election for nonpublic companies to switch from a fair value measurement of liability classified awards to an intrinsic value measurement. The election would be made as of the effective date of the final Update without the need for the entity to evaluate whether the change in accounting policy is preferable.

This change would be applied through a cumulative-effect adjustment to equity as of the beginning of the annual period in which the guidance is effective (modified retrospective).

Other decisions reached:

8.  Eliminating the Indefinite Deferral in Topic 718

The FASB affirmed an amendment to remove from Topic 718 the indefinite deferral of the requirement that an award becomes subject to other GAAP when the rights conveyed are no longer dependent on the holder being an employee. It should be noted that this decision is not expected to change current practice.  

The following proposal has been removed from this simplification project:

9. Classification of Awards with Repurchase Features

The FASB decided it may reconsider this proposal as part of another project on distinguishing liabilities from equity. 


Effective Date and Disclosures:

The amendments contained in the final ASU will be effective for fiscal years beginning after December 15, 2016 for public companies and after December 15, 2017 for nonpublic companies. Early adoption to any period will be permitted.

Certain disclosures will be required at transition, including the nature and reason for the change in accounting principle and quantitative information of the cumulative effect on retained earnings or additional paid in capital.
 



For more information, please contact one of the following regional practice leaders:

National Assurance Group
 
Adam Brown
National Director of Accounting
 
  Patricia Bottomly
National Assurance Partner
 

National Tax Services -  Topic 740 Group

Yosef Barbut
Tax Partner