FASB ready to draft proposed ASU on improvements to share-based payments accounting

Contents FASB discusses how to improve accounting for share-based payments
SEC provides guidance to investors and industry on cybersecurity

FASB discusses how to improve accounting for share-based payments All decisions reached at Board meetings are tentative and may be changed at future meetings. Decisions are included in an Exposure Draft only after a formal written ballot. Decisions reflected in Exposure Drafts are often changed in redeliberations by the Board based on information received in comment letters, at public roundtable discussions, and from other sources. Board decisions become final after a formal written ballot to issue a final Accounting Standards Update.

The FASB met on February 4 to discuss proposed transition methods for each tentative decision made to improve the accounting for employee share-based payments, as well as relevant disclosures and other related issues. Highlights of the Board’s discussion are featured below.

The Board has requested the staff to draft a proposed ASU incorporating all tentative decisions on accounting for employee share-based payments, with a comment period of 60 days.

Transition methods The Board tentatively decided to require a modified retrospective transition method, with a cumulative-effect adjustment to retained earnings, for the following proposed changes:

  • To allow an exception to liability classification when an employer withholds shares for tax withholding purposes, as long as the value of shares withheld does not exceed the maximum statutory rate in the applicable jurisdiction. This exception contrasts with the current requirement under U.S. GAAP limiting the value of withheld shares to the minimum statutory withholding requirement. These changes would be applied to outstanding liability awards at the date of adoption.
  • To allow an accounting policy election to either estimate the number of forfeitures when determining compensation expense or recognize forfeitures as they occur
  • To align the classification guidance for put and call rights embedded in a share that are contingent on an event within the employee’s control. Under this tentative decision, the entity would consider at each reporting period whether the contingent event is probable of occurring in order to assess classification, regardless of whether the employee controls the contingent event. These changes would be applied to outstanding liability awards at the date of adoption.
  • To provide a one-time election for nonpublic entities to change the measurement of their liability-classified awards from fair value to intrinsic value
  • To remove the requirement to delay the recognition of an excess tax benefit until realized

The Board tentatively decided to require a retrospective transition method for the following proposed changes:

  • To classify cash paid as a financing activity in the cash flows statement when an entity directly withholds shares to meet minimum statutory withholding requirements
  • To remove the requirement for employers to present excess tax benefits as a cash inflow from financing activities and an outflow from operating activities

The Board tentatively decided to require a prospective transition method for the following proposed changes:

  • To require that all excess tax benefits and tax deficiencies be recognized in the income statement
  • To provide nonpublic entities with a practical expedient for estimating the expected term of an award

Disclosures The Board tentatively decided that, upon adoption, entities would be required to include disclosures for a change in accounting principle, as required in ASC 250-10-50, Accounting Changes and Error Corrections, except for the amount of the income-statement effect (direct or indirect) in the period of adoption.

The Board also tentatively decided to amend the disclosure requirements in ASC 718, Stock Compensation, to include information on unvested awards rather than awards expected to vest. This amendment would be applicable only to entities that elect to account for forfeitures as they occur.

Other matters The Board tentatively decided that it would select an effective date after evaluating feedback from the exposure draft process. In addition, the Board tentatively decided to remove the indefinitely deferred guidance within ASC 718 that requires an instrument subject to stock-based compensation guidance to be subjected to other guidance in U.S. GAAP when the rights conveyed no longer depend on the holder being an employee. Because this guidance is indefinitely deferred, removing it from the Codification will not impact current U.S. GAAP or accounting practices.

SEC provides guidance to investors and industry on cybersecurity On February 3, the SEC’s Office of Compliance Inspections and Examinations issued a Risk Alert on cybersecurity that summarizes the staff’s observations from examining certain registered broker-dealers and investment advisers under the Cybersecurity Examination Initiative. The examination primarily focused on how these firms identify and address cybersecurity risks in order to assess their current state of preparedness.

On the same date, the SEC’s Office of Investor Education and Advocacy issued an Investor Bulletin that provides core tips to help investors safeguard their online investment accounts.

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