The widely anticipated Accounting Standards Update (ASU) 2016-09, Improvement to Employee Share-based Payment Accounting, was issued by the FASB on March 30, 2016. ASU 2016-09 is effective for public business entities for annual reporting periods after December 15, 2016 (and interim periods within that reporting period). There is a one year lag on effective dates for all non-public business entities that can adopt the ASU for annual financial reporting periods after December 15, 2017 (and interim periods within that period). Early adoptions are permissible as of the beginning of any annual or interim period; however if an entity chooses to early adopt, it must adopt all of the amendments in the same period.
ASU 2016-09 proposes significant modifications to ASC 718 in the areas of share-based payments. Under the new ASU, all of the excess tax benefits (“windfalls”) and tax deficiencies (“shortfalls”) will be recognized as part of the income tax expense income statement. Currently windfalls are recognized as a component of “Additional Paid-In Capital” and shortfalls are recorded in equity to the extent of prior windfalls, and then to the income statement. Under the current accounting standards, windfalls are not recognized in the income statement until the deductions actually reduce the income tax payable.
The new ASU also mandates several other changes in addition to the above amendment. The excess tax benefits are disclosed as an operating activity on the cash flow statement. An entity can make an accounting policy election to either estimate the number of awards expected to vest or account for the forfeitures as they arise. Employer-paid withholding taxes will be classified as a financing activity on the cash flow statement. The minimum statutory withholding requirements will be simplified to allow business entities to withhold the employees’ maximum individual tax rate without subjecting the award to liability classification. There are also other amendments which relate to non-public business entities.
The new ASU will likely result in substantial changes to a company’s net income and earnings per share since all windfalls and shortfalls will be recognized on the income statement. Therefore, it is expected that the volatility of earnings for many companies will increase from quarter to quarter.
It is important for companies to assess the need for and impact of early adoption of ASU 2016-09. The ASU is relatively new and the different variables and circumstances of each taxpayer will dictate the need for early adoption. Although ASU 2016-09 is meant to simplify an extremely complicated area of income tax accounting, the ASU will vary between different taxpayers. A conversation between the tax provision preparer, the company and the company’s auditors should commence sooner rather than later to ensure a seamless adoption of ASU 2016-09.
Contact us today to ensure your business is compliant with the updated provisions.
Yung Ling is a partner in BPM’s Corporate Tax Group, and has extensive public accounting experience servicing public and pre-IPO companies on complicated tax provisions, cross-border restructuring, Subpart F planning, and global corporate tax compliance issues. Contact Yung Ling at YLing@bpmcpa.com or at 408.961.5565.