FASB Puts Stock-Based Compensation on Its Agenda

The Financial Accounting Standards Board seeks to simplify accounting for stock awards

By Stephen Miller, CEBS Oct 21, 2014
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“Simplified accounting for stock compensation may be coming soon,” said Ken Stoler, a partner at PricewaterhouseCoopers (PwC).

The Financial Accounting Standards Board (FASB) added a project to simplify and improve accounting for stock-based compensation at its Oct. 8, 2014, board meeting, noting it will address technical issues involving stock compensation such as accounting for income taxes on vesting or settlement of awards, and the related presentation of excess tax benefits on the statement of cash flows.

The FASB’s tentative positions, if finalized, could significantly ease some of the complex accounting requirements for companies that pay stock-based compensation, said Stoler, who analyzed the project in an Oct. 16 PwC HRS Insight post.

“Certain aspects of stock compensation accounting are complex and time-consuming for companies,” Stoler explained in an e-mail to SHRM Online. “One example is the treatment of tax benefits (i.e., deductions) on equity awards, which under current rules can require splitting the deduction between income and equity. This also requires the company to track the tax benefits that were previously recognized in equity, and potentially reverse those amounts in the future if deductions are lower than expected. This tracking is not easy, and it’s not clear that financial statement users (investors, analysts) perceive much value in the current rules. The changes that are proposed by FASB could simplify this area, as well as other aspects of the guidance.”

However, these changes, while welcome, could initially pose administrative challenges because of the amount of systems reprogramming that will be necessary, Stoler cautioned.

“Companies that maintain share-based payment compensation programs should consider reviewing the FASB accounting improvement alternatives and monitoring FASB guidance for additional changes and proposals,” he advised.

Paying Contractors in Company Stock

A separate but related project that FASB added to its agenda will address potential improvements to accounting for share-based payments to nonemployees operating as contractors. In some situations, companies choose to pay independent contractors with company stock in the form of stock options, restricted stock or outright stock grants. This is particularly common among startups with limited cash reserves or private companies that intend to be publicly traded in the future. Often, stock-based compensation arrangements involve consultants the company hires for a specific project.

The FASB’s project will look specifically at the scope of guidance regarding nonemployee stock awards, and accounting for awards when there are unresolved issues regarding the contractor’s performance.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

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