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.

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