FASB clarifies scope of ASC 718 for profits interest awards

 

The FASB recently issued ASU 2024-01, Scope Application of Profits Interest and Similar Awards, to add illustrative examples that demonstrate how the scoping guidance in ASC 718-10-15-3 applies to profits interest or similar awards. Typically, entities grant profits interest awards to their employees and nonemployees in exchange for goods or services, and those awards align the grantee’s compensation with an entity’s operating performance. The amendments in the ASU are designed to reduce diversity in practice, and will result in profits interest awards with similar terms being more consistently accounted for within the scope of either ASC 718, Compensation – Stock Compensation, or other Topics, such as ASC 710, Compensation – General.

 

The amendments are effective for public business entities for annual periods, including interim periods within those annual periods, beginning after Dec. 15, 2024. All other entities are required to apply the new guidance for annual periods, including interim periods within those annual periods, beginning after Dec. 15, 2025. Early adoption is permitted. The amendments must be applied either retrospectively to all prior periods presented or prospectively to profits interest awards granted or modified on or after the effective date.

 

Snapshot 2024-05, “FASB clarifies ASC 718’s scope for profits interests,” summarizes the new amendments and discusses case studies added to ASC 718, along with insights from Grant Thornton’s Accounting Principles Group as well as FASB citations.

 

Download Snapshot 2024-05 for a reader-friendly version.

 

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