An overview of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.  An amendment to ASC Topic 718, Compensation – Stock Compensation.

On March 30, 2016, the Financial Accounting Standards Board (FASB) continued their Simplification Initiative by issuing ASU 2016-09, Improvement to Employee Share-Based Payment Accounting.  The Simplification Initiative is the Board’s attempt to identify and evaluate areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements.

Preparing for ASU 2016-09

The changes brought about by ASU 2016-09 will likely reduce the administrative costs and complexities related to tracking addition paid-in capital (APIC) pools.  While reducing these costs and complexities, the ASU will have an impact on net income and earnings per share.  Entities could see an increase in the volatility of net income and earnings per share once ASU 2016-09 is implemented.  It will also be important for entities to understand that the new guidance could impact current systems, processes and controls.

Impact on public and non-public entities

Recognition of excess tax benefits and deficiencies related to share-based payments

ASU 2016-09 eliminates the notion of the APIC pool and requires excess tax benefits and deficiencies to be recognized within income tax expense or benefit in the income statement.  Excess tax benefits are recognized regardless of whether the benefit reduces taxes payable in the current period.  Tax benefits and tax deficiencies are considered discrete items in the reporting period in which they occur and are not included in the estimate of an entity’s annual effective tax rate.  Entities should use a prospective approach upon adoption in order to account for income taxes upon exercise or vesting, as well as expiration or forfeiture of share-based payments that occur during the period of adoption and thereafter.

Entities should recognize all excess tax benefits previously unrecognized along with any valuation allowance on a modified retrospective basis as a cumulative-effect adjustment to retained earnings as of the date of adoption.  There is no change to the guidance on evaluating these and other deferred tax assets when determining the necessity of a valuation allowance.

Presentation of certain share-based payment items on the statement of cash flows

The ASU contains amendments applicable to the statement of cash flows related to the classification of excess tax benefits and the classification of employee taxes paid when an employer withholds shares for tax withholding purposes.  The guidance in the ASU requires excess tax benefits to be presented along with other income tax cash flows as an operating activity.  A retrospective or prospective approach may be used when adopting this provision.


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Existing GAAP does not contain specific guidance for the classification of employee taxes paid, which has led to diversity in practice.  The new guidance requires employee taxes paid to be presented as a cash outflow from financing activities.  A retrospective approach is required when adopting this provision.

Accounting for forfeitures of share-based payments

The guidance under ASU 2016-09 allows an entity to record compensation cost consistent with current GAAP or account for forfeitures as they occur.  There is no requirement to change from current GAAP, but an entity must disclose the accounting policy that is being followed.  A modified retrospective approach is required when adopting this provision.

Withholding related to share-based payments

Under current GAAP, liability classification would result if shares in an amount exceeding the minimum statutory tax withholding requirements for the employer are withheld or may be withheld at the employee’s discretion at settlement.  ASU 2016-09 moves the threshold for liability classification from the minimum statutory tax withholding requirements of the employer to the maximum statutory tax rate for an employee in the applicable jurisdiction.  A modified retrospective approach is required when adopting this provision.

Impact on nonpublic entities

ASU 2016-09 contains provisions impacting the expected term of share based payments and intrinsic value that only impact non-public entities.  The ASU grants a practical expedient to non-public entities for determining the expected term of certain share-based awards.  This provision would be applied using a prospective approach.  It also allows non-public entities to change their measurement basis for all liability classified awards to intrinsic value at the time the ASU is adopted.

Important implementation dates

Public business entities are required to implement ASU 2016-09 for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods.  All other entities are required to implement for annual reporting periods beginning after December 15, 2017 and interim periods within annual reporting periods beginning after December 15, 2018.  Early adoption of ASU 2016-09 is permitted.


About the Author:

Jesse MeadowsJesse Meadows, CPA is a partner on our Community Bank Services team and leads our Roanoke office. Jesse has been working with community banks since 2005 and has extensive experience in SOX/FDICIA consulting as well as outsourced internal audit engagements.

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