By Lawrence Yee, CPA
With the release of Accounting Standards Update (ASU) 2016-09 by FASB, accounting for employee share-based payments will take a more simplified approach to both accounting and financial reporting. One change noted in the ASU is that any excess tax benefit that used to be recognized as additional paid-in capital is now to be recorded as income tax expense. Any tax deficiencies are now to be reported on the income statement and cannot be used to offset accumulated excess tax benefits.
An election can be made to account for forfeitures as they occur or to follow previous GAAP standards. ASU 2016-19 also allows for nonpublic entities to use a practical expedient to estimate the expected term of certain share-based awards. Any nonpublic entity can now choose to value awards at their intrinsic value instead of their fair value and no longer have to demonstrate the reasoning for choosing intrinsic value or fair value.
Cash flow presentation has also changed in regards to any excess tax benefits. Previously, GAAP required any excess tax benefits to be shown as cash inflows from financing and cash outflows from operating activities. With the implementation of ASU 2016-09, tax benefits are classified as an operating activity. Cash payments from an employer to a taxing authority on an employee's behalf will now be classified as a financing activity if the employer withholds shares from an award for the purpose of making the payment.
Other items addressed in the ASU relate to minimum statutory tax withholding requirements, the ability to use a practical expedient related to estimated terms of certain share-based awards and the elimination of the indefinite deferral in Topic 718. The ASU states that share-based payment transactions will no longer have to be accounted as a liability if the amount withheld does not exceed the amount calculated on the basis of the employee's maximum individual statutory rate and that nonpublic entities are allowed to use a practical expedient for term estimation.
The amendments stated in ASU 2016-09 will be effective for annual periods beginning after Dec. 15, 2016 for public entities and are effective for other entities with an annual reporting period that begins after Dec. 15, 2017, and interim periods within annual periods that begin after Dec. 15, 2018. Early adoption is also allowed.
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