April 12, 2016 NDS 2016-06 New Developments Summary Share-based payments guidance simplified Targeted amendments in ASU 2016-09 eliminate unnecessary complexity Summary The FASB recently issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, to simplify several aspects of accounting for share-based payment transactions. The simplifications affect the following areas: Accounting for excess tax benefits and tax deficiencies Classifying excess tax benefits on the statement of cash flows Accounting for forfeitures Classifying awards that permit share repurchases to satisfy statutory tax-withholding requirements Classifying tax payments on behalf of employees on the statement of cash flows For nonpublic entities only, determining the expected term and electing the intrinsic value measurement alternative for stock option awards The new guidance is effective for public business entities in fiscal years beginning after December 15, 2016 and in interim periods within those fiscal years. Other entities must apply the new guidance in fiscal years beginning after December 15, 2017 and in interim periods within fiscal years beginning after December 15, 2018. The guidance requires a mix of prospective, modified retrospective, and retrospective transition. Early adoption is permitted, provided that an entity adopts all the amendments in the same period. An entity that early adopts the new guidance in an interim period must reflect any modified retrospective transition adjustments as of the beginning of the fiscal year that contains that interim period. The new guidance applies only to employee awards accounted for under ASC 718, Compensation Stock Compensation, and does not apply to nonemployee awards accounted for under ASC 505-50, Equity: Equity-based Payments to Non-employees.
New Developments Summary 2 Accounting for excess tax benefits and tax deficiencies Under current U.S. GAAP, an entity must recognize excess tax benefits associated with share-based payment awards in additional paid-in capital (APIC) when the excess tax benefits are realized (that is, when they reduce current income taxes payable). Excess tax benefits accumulated in APIC are known as the APIC pool. An entity generates excess tax benefits when the tax deduction for a share-based payment award exceeds the award s compensation cost under U.S. GAAP. Conversely, tax deficiencies arise when a tax deduction is less than compensation cost. The APIC pool is reduced by current and future tax deficiencies. Once the APIC pool is exhausted, an entity must recognize any additional tax deficiencies in the income statement. The new guidance rescinds the current guidance requiring entities to recognize only excess tax benefits that have been realized. Therefore, entities will record excess tax benefits in the reporting period in which they occur, regardless of whether the benefits reduce current income taxes payable. Entities will also recognize excess tax benefits and tax deficiencies as income tax benefit or expense, respectively, in the reporting period in which they occur. As a result of these changes in accounting for tax benefits and deficiencies, the new guidance simplifies accounting for share-based payment awards by eliminating the APIC pool. The new guidance does not require an entity to record an accounting entry on transition to remove an existing APIC pool from its balance sheet. The new guidance also amends the current guidance for calculating earnings per share as a result of the tax benefits and deficiencies changes described above. When applying the treasury stock method to calculate diluted earnings per share, entities will no longer increase or decrease the assumed proceeds from an employee vesting in, or exercising, a share-based payment award by the amount of excess tax benefits previously credited to the APIC pool or by the amount of tax deficiencies previously debited to the APIC pool, respectively. Excess tax benefits and tax deficiencies will be treated as discrete items in the reporting period in which they occur, meaning that an entity should not consider them in determining its estimated annual effective tax rate. Entities must apply the new guidance on accounting for excess tax benefits and tax deficiencies prospectively, except for excess tax benefits that were identified from previous transactions that had not been previously recognized because the related tax deduction did not reduce income taxes payable. Entities must use a modified retrospective transition method to recognize such excess tax benefits as a credit to retained earnings, and as a debit to deferred tax assets, as of the beginning of the period of adoption. Any deferred tax assets recorded in connection with the modified retrospective recognition of excess tax benefits must be assessed for realizability, and, if necessary, a valuation allowance must be recognized through a cumulative-effect adjustment to retained earnings. Adopting the new guidance in an interim period Entities that choose to adopt the new guidance in an interim period are required to make certain adjustments to opening retained earnings in the fiscal year that contains the interim period of adoption.
New Developments Summary 3 For example, assume a calendar-year public company adopts the new guidance in the second quarter of 2016. The company would adjust retained earnings as of January 1, 2016 to reflect the recognition of excess tax benefits that were not realized because they did not reduce current taxes payable in prior periods. Also, as of January 1, 2016, the company would recognize any related deferred tax assets and, if necessary, a valuation allowance. For second-quarter and year-to-date net income, the company would recognize any excess tax benefits and tax deficiencies that occurred during those periods as income tax benefit or expense, respectively. When reporting results for the first quarter of 2017, the company would recast its first-quarter 2016 results to reflect adoption of the new guidance. Classifying excess tax benefits in the statement of cash flows Under current U.S. GAAP, realized excess tax benefits are classified as both a cash inflow from financing activities and a cash outflow from operating activities on the statement of cash flows. The new guidance simplifies the presentation of excess tax benefits on the statement of cash flows by requiring entities to classify the related cash flows in operating activities as part of cash payments for taxes. Entities can choose to apply this guidance prospectively or retrospectively. Accounting for forfeitures Under current U.S. GAAP, an entity recognizes compensation cost only for share-based payment awards that vest; therefore, an entity must estimate the number of awards that will be forfeited so that compensation cost is appropriately recognized over an award s requisite service period. Under the new guidance, an entity is permitted to make an accounting policy election, applicable to all share-based payment awards, to account for forfeitures as they occur, rather than estimating forfeitures as of an award s grant date. Entities must adopt this guidance using a modified retrospective transition method, recognizing a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Forfeitures related to replacement awards in business combinations Although an entity may elect to account for forfeitures when they occur, the new guidance specifies that this election does not apply to replacement share-based payment awards that are exchanged for awards held by employees of an acquiree and included in purchase consideration under ASC 805, Business Combinations. Under the new guidance, nonvested replacement awards must reflect estimated forfeitures when an acquirer determines consideration transferred in the business combination. The fair value of replacement awards excluded from consideration transferred in accounting for a business combination represents compensation for postcombination employee services, and
New Developments Summary 4 should be recognized in expense over the appropriate future requisite service period(s). Following a business combination, an entity that elects to recognize forfeitures as they occur should prospectively recognize all forfeitures, regardless of whether an award was granted in a prior business combination. Classifying awards that permit repurchases to satisfy tax withholding Certain share-based payment awards permit the issuer to withhold shares to satisfy statutory taxwithholding requirements. In situations where an entity withholds shares for this purpose, it effectively repurchases the shares from the employee and, rather than transferring cash to the employee, remits cash to the appropriate taxing authority on the employee s behalf. Depending on the value of shares repurchased to satisfy statutory tax-withholding requirements, the related awards could require liability classification. Under current U.S. GAAP, entities are not required to classify awards subject to this type of withholding provision as liabilities, despite the potential share repurchase, as long as the value of the shares withheld does not exceed the minimum statutory tax-withholding requirement on an employee-by-employee basis in the relevant jurisdiction. The new guidance expands this exception to liability classification to include awards that permit withholding up to the maximum statutory tax rate in the relevant jurisdiction. Importantly, the maximum tax rate should be determined only for each jurisdiction; entities would no longer need to determine the maximum rate that may be applicable to each specific employee in a particular jurisdiction. Entities must adopt this guidance using a modified retrospective transition method, recognizing a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The adjustment only affects liability-classified awards that have not been settled by the effective date of the new guidance. Classifying tax payments on employees behalf in statement of cash flows U.S. GAAP does not currently address the classification of cash payments to a taxing authority based on shares withheld under statutory tax-withholding provisions in a share-based payment award. The new guidance requires entities to classify these payments as cash outflows from financing activities on the statement of cash flows. Entities must apply this guidance retrospectively. Practical expedients for nonpublic companies Expected term Under current U.S. GAAP, nonpublic entities are required to use a valuation technique that considers the expected term to estimate the fair value of employee stock options, provided that observable market prices for the options are not available.
New Developments Summary 5 The new guidance provides the following practical expedient for nonpublic entities to estimate an award s expected term: If vesting depends only on a service condition, then an entity may estimate the expected term of an award as the midpoint between the requisite service period and the award s contractual term. If vesting depends on a performance condition, an entity must first determine whether it is probable that the performance condition will be achieved and then If it is probable that the performance condition will be achieved, estimate the expected term of the award as the midpoint between the requisite service period and the award s contractual term. If it is not probable that the performance condition will be achieved, estimate the expected term as either The requisite service period, if it is implied based on the performance condition The midpoint between the requisite service period and the contractual term, if the requisite service period is explicitly stated in the award Nonpublic entities are permitted to elect this practical expedient as an accounting policy for awards that have all the following characteristics: The award is a share option or similar instrument granted at the money. The award is exercisable for a limited period of time (typically between 30 and 90 days) after the termination date if an employee terminates employment after vesting. The employee can realize value only by exercising the award, meaning the award cannot be sold or hedged. The award does not contain a market condition. This practical expedient is applied prospectively. Measurement alternative for liability-classified awards U.S. GAAP currently allows nonpublic entities to adopt an accounting policy to measure liability-classified share-based payment awards at intrinsic value. Many entities were unaware of this option and therefore established accounting policies to measure liability-classified awards at fair value. The new guidance allows nonpublic entities to adopt an accounting policy to measure liability-classified awards at intrinsic value as of the effective date of the new guidance without considering whether such a policy is preferable to measuring liability-classified awards at fair value. Entities must adopt this guidance using a modified retrospective transition method, recognizing a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The adjustment affects only liability-classified awards that have not been settled by the effective date of the new guidance. Effective date The new guidance is effective for public business entities for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years.
New Developments Summary 6 Other entities must apply the guidance in fiscal years beginning after December 15, 2017 and in interim periods within fiscal years beginning after December 15, 2018. Early application is permitted for any reporting period for which financial statements have not been issued (for public business entities) or made available for issuance (for entities other than public business entities). An entity must apply all of the guidance in ASU 2016-09 in the same reporting period. If an entity early adopts the new guidance in an interim period, it must apply the modified retrospective transition provisions as of the beginning of the fiscal year that includes that interim period. 2016 Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved. This Grant Thornton LLP bulletin provides information and comments on current accounting and tax issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting, tax, or other advice or guidance with respect to the matters addressed in the document. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this document. Moreover, nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. For additional information on topics covered in this document, contact your Grant Thornton LLP professional.