FASB decides to propose changes to stock compensation tax accounting
February 2015
During its decision-making meeting on February 4, 2015, the FASB ("Board") agreed to issue an exposure draft proposing revisions to various guidance in the stock compensation standard. Among the proposed revisions are the following revisions related to income taxes:
The Board directed the FASB staff to prepare an exposure draft in order to solicit broad stakeholder input. The draft is expected to be issued in April/May 2015. Stakeholders will have the opportunity to provide feedback during a 60-day comment letter period.
On February 4, 2015, the FASB held a decision-making meeting with the purpose of deciding on whether to issue an exposure draft related to potential improvements and simplifications to the current accounting for stock-based compensation. The changes include certain broadly applicable areas of income tax accounting. The Board voted on various items throughout the meeting including the changes to be proposed, transition methods, transition disclosures and effective dates.
The impetus for the consideration of these topics came from several sources. For more information, please refer to our recent TAS publication covering the October agenda prioritization meeting FASB adds stock compensation tax accounting topics to its agenda.
After conducting research as directed by the Board, the FASB staff presented the Board with specific recommendations for improving tax accounting for stock-based compensation. The Board voted to include two income tax accounting changes related to a stock-based compensation.
The first proposed change will require the recognition of all windfalls and shortfalls within income tax expense. (Windfalls occur when a stock-based award results in a larger tax deduction than the amount of compensation recorded for book purposes, whereas shortfalls occur when the award results in zero or less of a tax deduction than the related book charge.) This would replace the current guidance which records windfalls in equity and allocates the tax effects of shortfalls between equity and income tax expense.
The FASB staff noted the change would eliminate the necessity of maintaining a windfall "pool" and the potential asymmetry in the classification of tax effects. The change included the staff’s recommendation to remove the current requirement that cash taxes payable must be reduced in order to record a windfall. The staff had also considered potential convergence with IFRS but concluded that convergence would not result in simplification.
The second proposed change eliminates the current requirement to display the gross amount of windfalls as an operating outflow and financing inflow in the cash flow statement. The FASB staff noted that this presentation does not reflect actual cash flows, and represents the only exception from single-line presentation of taxes within operating cash flows.
The exposure draft will propose prospective application of the windfalls/shortfalls change, and modified retrospective transition (i.e., cumulative catch-up adjustment) for the elimination of the cash taxes payable requirement for windfalls. Retrospective application will be proposed for the change in the presentation of windfalls in the cash flows statement.
The Board decided to wait until comments are received on the exposure draft before deciding on the effective date.
The steps recently taken by the FASB and the ongoing efforts of the FASB staff are intended to reduce the complexity of accounting for income taxes. Organizations should be giving attention to the implications of the changes being proposed in these tax accounting areas. Consideration should be given to responding to the exposure draft once it is issued.
There are also other tax accounting standard setting developments, as the FASB issued an exposure draft in January related to two other widely relevant tax accounting topics. Please refer to our recent publication for more information FASB proposes two ASUs on income taxes as part of simplification initiative. Income taxes are also included in the Disclosure Framework project and the FASB staff continues to study intraperiod tax allocation.
For a deeper discussion of how the FASB actions may affect your business, please contact:
David Wiseman +1-(617)-530-7274 david.wiseman@us.pwc.com |
Edward Abahoonie +1-(973)-236-4448 edward.abahoonie@us.pwc.com |
Kyle Quigley +1-(973)-236-7843 kyle.quigley@us.pwc.com |