In an effort to streamline the complexity in accounting standards, the Financial Accounting Standards Board (FASB) has engaged in the “Simplification Initiative.” The initiative’s main objective is to identify, evaluate and improve areas of generally accepted accounting principles (GAAP) to reduce cost and complexity.
These proposals could have significant administrative impact. Plan sponsors should keep in close contact with their grants/awards administrator to see which proposals are accepted and how each one may affect the employee equity plans they provide.
Here’s a look at the proposed changes:
These proposals could have significant administrative impact. Plan sponsors should keep in close contact with their grants/awards administrator to see which proposals are accepted and how each one may affect the employee equity plans they provide.
Here’s a look at the proposed changes:
Topic | Current practice | Proposed practice |
| Income tax accounting – elimination of an APIC pool | Excess tax benefits are recognized in additional paid-in-capital (APIC). Companies maintain an APIC pool to offset any tax deficiencies. | By recognizing the excess tax benefits and tax deficiencies within the income statement, the proposal would eliminate the need to maintain an APIC pool. |
| Statutory share withholding requirement | Share withholding is only allowed up to the minimum statutory requirement. Withholding more triggers liability accounting. The current minimum rate is 25 percent. | Allow share withholding up to the maximum individual tax rate in the applicable participant’s jurisdiction. |
| Share withholding tax classification | No guidance about the cash flow classification for these transactions. | Shares withheld to pay for taxes would be classified as a financial activity. |
| Forfeitures | Compensation accruals are based on an estimated forfeiture rate. | An entity would have to make a decision to either estimate the forfeitures or account for forfeitures as they occur. |
| Expected terms | Entities must estimate the period an option will be outstanding. | Allow private companies to use a more simplified method when calculating expected term. Private companies would be able to use the same method that is used for the majority of stock options as allowed by the SEC. |
| Intrinsic value | Private companies unable to make one-time election to change the measurement classification methodology from fair value to intrinsic value. | A private company will be able to make this election. |