Simplification of aspects of stock-based compensation accounting

The FASB issued two accounting standards updates in 2016 and 2017, amending the accounting for stock compensation / share-based payments.

The FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in March 2016. Intended to simplify aspects of the accounting for and reporting of stock-based compensation as follows:

  • the tax effects of share-based payments will now be recognized in the income statement;
  • windfall benefits/shortfalls will be reported as deferred tax assets/liabilities when they arise;
  • all tax-related cash flows from share-based payments will be reported as operating activities in the statement of cash flows;
  • the classification of awards as liabilities or equity due to tax withholdings may change; and
  • accounting for forfeitures may change.

Nonpublic entities have two additional simplification provisions related to determining the expected term of certain share-based awards, and upon adoption of the new guidance, a one-time opportunity to change the measurement basis for all liability-classified awards to intrinsic value.

The guidance was effective in Q1 2017 for calendar year-end public business entities and is effective in 2018 for calendar year-end nonpublic business entities.

Separately, the FASB issued new guidance ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, in May, 2017, to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification.

  • Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions of the award.
  • The guidance is effective in 2018, including interim periods within 2018, for all calendar year-end entities. Early adoption is permitted.
  • The guidance will be applied prospectively.

Video perspectives

The accounting for stock compensation is changing effective in 2017 for calendar year-end public business entities and in 2018 for calendar year-end nonpublic business entities. The tax effect of stock compensation will now all go directly to the income statement. Things are also moving on the cash flow statement. All tax related cash flows will now be included as operating activities. Watch PwC’s Nicole Berman describe these and other changes.

 

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Stock compensation simplification

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Heather Horn
US Strategic Thought Leader, National Professional Services Group, PwC US
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IFRS & US Standard Setting Leader, National Professional Services Group, PwC US
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