FASB Issues Update to Simplify Accounting of Stock-Based Compensation | Practical Law

FASB Issues Update to Simplify Accounting of Stock-Based Compensation | Practical Law

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09 that is intended to simplify and improve employee share-based payment accounting.

FASB Issues Update to Simplify Accounting of Stock-Based Compensation

Practical Law Legal Update w-001-8366 (Approx. 4 pages)

FASB Issues Update to Simplify Accounting of Stock-Based Compensation

by Practical Law Employee Benefits & Executive Compensation
Published on 04 Apr 2016 • USA (National/Federal)
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09 that is intended to simplify and improve employee share-based payment accounting.
On March 30, 2016, as part of its Simplification Initiative, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, which amends Accounting Standards Codification (ASC) 718, "Compensation – Stock Compensation" to simplify several aspects of the accounting of share-based payment awards, including:
  • Accounting for income taxes.
  • Classification of excess tax benefits on the statement of cash flows.
  • Forfeitures.
  • Statutory tax withholding requirements.
  • Classification of awards as either equity or liabilities.
  • Classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes.
The ASU also provides:
  • A simplified method for private companies to estimate the expected term of an award.
  • A one-time election for private companies to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value.
As a result of the ASU, some companies may want to change their equity arrangements to permit withholding up to the employer's maximum statutory tax withholding requirements. Currently, an award must be classified as a liability award if the employer may withhold from shares being delivered to the participant more than the employer's minimum statutory withholding requirements. The ASU modifies this exception by allowing employers to withhold up to the maximum statutory tax rate for an employee in the applicable tax jurisdictions without triggering liability classification.
The ASU's amendments are effective:
  • For public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods.
  • For private companies for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.
Early adoption is permitted for any company in any interim or annual period.
For a basic overview of the accounting rules for stock-based compensation under FASB ASC Topic 718, see Practice Note, Basic Accounting For Stock-Based Compensation Under FASB ASC Topic 718.