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Journal entry — FASB discusses transition methods and transition disclosures related to simplified accounting for share-based payments

Published on: Feb 06, 2015

At its meeting this week, the FASB made tentative decisions about transition methods and transition disclosures related to previous Board decisions about simplified accounting for share-based payments.1

Previous Decisions and Transition

Below is a summary of (1) simplification decisions previously made at the FASB’s December 17, 2014,2 and October 8, 2014,3 meetings and (2) transition methods discussed at this week’s meeting.

Tax Withholding Requirements

Simplification Decision

The Board previously decided that a partial cash settlement provision for tax withholding would not in itself lead to classification of the award as a liability when the withheld amount does not exceed the highest marginal tax rate in the relevant tax jurisdiction(s).

Transition

The Board decided on a modified retrospective approach under which an entity would reassess outstanding liability awards as of the date of adoption and determine whether the awards should be reclassified as equity awards with a cumulative-effect adjustment to opening retained earnings.

Cash Flow Presentation of Withholding Taxes Paid When Shares Are Withheld From Employees

Simplification Decision

The Board previously decided that cash payments associated with shares withheld to meet withholding tax requirements should be presented as a financing activity in the statement of cash flows.

Transition

The Board decided that upon adoption, an entity should retrospectively apply this decision to all periods presented.

Excess Tax Benefits/Deficiencies Upon Vesting or Settlement of Awards

Simplification Decisions

The Board previously decided to remove the requirement to defer recognition of an excess tax benefit until the benefit is realized. Further, entities would be required to recognize all excess tax benefits and tax deficiencies in income tax expense as opposed to recognizing some of those amounts in additional paid-in capital.

Transition

The Board decided on a modified retrospective approach under which entities would recognize previously unrecognized excess tax benefits upon adoption as a cumulative-effect adjustment in equity, which eliminates the need to track unrecognized excess tax benefits going forward for both new and existing awards.

Further, the Board decided that the recognition of all excess tax benefits/deficiencies in the income statement should be applied prospectively.

Accounting for Forfeitures

Simplification Decision

The Board previously decided to allow entities to elect as an accounting policy either to continue to estimate the total number of awards that will ultimately vest or to account for forfeitures as they occur.

Transition

The Board decided on a modified retrospective approach under which entities that elect to recognize forfeitures as they occur would record a cumulative-effect adjustment to opening retained earnings as of the date of adoption.

Cash Flow Presentation of Excess Tax Benefits

Simplification Decision

The Board previously decided to require entities to present excess tax benefits as an operating activity in the statement of cash flow.

Transition

The Board decided that upon adoption, an entity should retrospectively apply this decision to all periods presented.

Classification of Awards With Repurchase Features

Simplification Decision

The Board previously decided to require entities to assess the probability of a contingent event’s occurrence when determining whether to classify an award as an equity or liability award regardless of which party (i.e., the entity or the employee) is in control of the event.

Transition

The Board decided on a modified retrospective approach under which entities would reassess the classification of outstanding liability awards as of the date of adoption.

Expected Term

Simplification Decision

The Board previously decided to allow private companies to use the simplified method4 to estimate the expected term for (1) awards with only service conditions and (2) awards with performance conditions when it is probable that the performance conditions (or performance conditions together with service conditions) will be met. If it is not probable that an award’s performance conditions will be met, private entities applying the practicable expedient would use the award’s contractual term as the estimate for the expected term.

Transition

The Board decided that private companies should apply the simplified method prospectively to new grants and modifications after the date of adoption.

Measurement of Awards at Intrinsic Value

Simplification Decision

The Board previously agreed to let private companies make a one-time election to switch from fair value to intrinsic value measurement for share-based payment awards classified as liabilities.

Transition

The Board decided on a modified retrospective approach under which private entities making the one-time election would measure outstanding liability awards as of the date of adoption at intrinsic value with a cumulative-effect adjustment to opening retained earnings. Further, the Board decided not to allow private entities to make this one-time election after the effective date of the proposed standard.

Transition Disclosures

The Board decided that upon adoption, an entity should provide all disclosures required under ASC 250-10-505 for a change in accounting principle except those related to the income statement effect.

Effective Date

The Board decided not to propose an effective date in its upcoming exposure draft. Instead, the exposure draft’s questions to stakeholders will solicit feedback regarding the effective date.

Next Steps

The Board directed its staff to draft a proposed Accounting Standards Update, which is expected in the second quarter of 2015. The proposal will provide for a 60-day comment period.

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1 For all decisions made to date regarding the FASB’s project to simplify the accounting for share-based payments, see Deloitte’s project summary page.

2 See Deloitte's December 19, 2014, journal entry.

3 See Deloitte's October 24, 2014, journal entry.

4 Question 6 of SEC Staff Accounting Bulletin (SAB) Topic 14.D.2, “Expected Term,” outlines a simplified method of estimating the expected term to be the midpoint between the vesting term and the contractual term (i.e., the expected term = (vesting term + original contractual term) ÷ 2).

5 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

Journal entry — FASB discusses transition methods and transition disclosures related to simplified accounting for share-based payments Image

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