Update 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
When ASU 2016-09 was first released by FASB, it was regarded as a big step towards simplifying various provisions on how to account for stock compensation from an income tax perspective and their presentation in the financial statements. As with many FASB updates changes were not effective immediately, but could be adopted prospectively. With stock prices surging at the end of 2016, a good amount of companies chose to adopt the new provisions early. While the early adoption was voluntary, public companies no longer have the choice and need to adopt the new ASU for reporting years ending after December 16, 2016 and its earliest interim period. Since implementation is no longer optional for public companies, we are going to recap the major implications of the update from a tax perspective.
Generally speaking, a company will recognize a different tax benefit upon vesting of restricted shares or exercises of non-qualified stock options compared to the book expense recorded. Past treatment required that companies track historical tax benefits to determine whether any benefit or shortfall should be recorded through the income statement or balance sheet. Tracking these tax differences was rather tedious. ASU 2016-09 simplified the tax accounting approach by determining that regardless of past performance, any kind of tax benefit or shortfall will be recorded through the income statement. For example, upon vesting of a restricted share grant, the company will now determine the tax deduction (FMV at time of vesting * shares granted) and compare these to the book expense recorded related to the grant. If the tax deduction exceeds book expense, a benefit will recorded to the income statement reducing tax expense. Alternatively, if the book expense exceeds the tax deduction, additional income tax expense needs to be recorded. Similar treatment will occur for options exercises. Given that these items hit the income statement, they are discrete period items and companies cannot spread them over interim periods. Estimates of vesting and exercises throughout the year are not available.
Under previous guidance an odd rule existed that required off-balance sheet tracking of tax benefits on stock compensation when a company was in an NOL position. While the company loss company would show the reduction to taxable income on their tax returns in the years occurred, for financial statement purposes those items would have to be tracked “off-balance” until the company could realize the tax benefit. This resulted in tax return NOLS that were different from balance sheet NOLs, further complicating an already complicated issue. Going forward, the ASU simplified the treatment and all benefits are recognized, and the balance sheet deferred assets are subject to normal valuation allowance considerations.
For companies using stock to compensate employees, directors and other vendors, income tax expense on the company’s income statement may fluctuate more going forward. However this fluctuation will be explained in the rate reconciliation and will be no different than other tax items affecting permanent taxable income. Overall, the simplified accounting should be a relief to companies and result in beneficial effects in years of rising stock prices.
While the implementation of this new standard is currently optional for private companies, it will become mandatory beginning in 2018. For more information on how this new guidance may impact your business, or help with your unique situation, please reach out to Patrick Tuley, Tax Partner firstname.lastname@example.org or 404-420-5670.