FASB discusses income tax accounting for stock compensation

September 2014

In brief

During its meeting on September 10, 2014, the Financial Accounting Standards Board ('FASB' or 'Board') preliminarily discussed whether the following topics should be added to its Simplification agenda:

The Board asked the staff to perform additional research on these topics, which will be presented to the Board in an upcoming meeting in which the Board will decide whether to add the topics to its agenda.

In detail

On September 10, 2014 the FASB held a pre-agenda discussion meeting with the purpose of providing preliminary feedback to the staff on certain pending research projects. These projects include follow-up on both the Financial Accounting Foundation's (FAF) recently concluded Post- Implementation Review of stock-based compensation accounting as well as stakeholders' ideas communicated in response to the Board's Simplification Initiative. For more information, please refer to our TAS newsletter regarding the recent Agenda Prioritization meeting FASB adds income tax accounting topics to its agenda.

The FASB staff performed additional research and outreach on all of the foregoing. The staff presented the Board with specific simplification suggestions relating to tax accounting for stock-based compensation.

Several of the issues presented to the Board were recently highlighted in PwC's Point of view: Accounting for income taxes – A case for simplification.

Topics discussed

The staff suggested that alternatives to the current guidance could include recording all excess tax benefits ("windfalls") and deficiencies ("shortfalls") either in income tax expense or in equity.

The staff noted that either approach would eliminate the necessity of maintaining a "windfall pool" and the potential asymmetry in the classification of tax effects.

The staff also suggested, under either view, eliminating the requirement that cash taxes payable be reduced in order for windfall benefits to be recorded.

The Board noted that a decision to record all "windfalls" and "shortfalls" in equity would be impacted if the Board later decided to pursue simplification of the intraperiod tax allocation rules. The staff is researching the possibility of revising the intraperiod tax allocation rules as a result of the Agenda Prioritization meeting.

In addition, the staff suggested that the separate line item presentation of windfall benefits in the statement of cash flows be reconsidered. It was noted that this presentation is in fact not an actual cash flow and represents the only exception from single-line measurement of taxes within operating cash flows. Consideration of this topic may or may not depend upon decisions made with respect to the related accounting topics mentioned above.

Request for additional staff research

The Board asked the FASB staff to undertake additional research to consider various alternatives with respect to the accounting for tax benefit shortfalls and windfalls. The analysis will include a comparison with the IFRS treatment. A comparison of the US GAAP and IFRS approach can be found in PwC's publication Stock option awards under IFRS: An analysis of the potential impact.

The takeaway

Accounting for income taxes continues to be a complex challenging area of financial accounting. Users of financial statements continue to look for decision useful information on cash flows and risks related to income taxes. Preparers and auditors continue to struggle with the cost and complexity of compliance.

The steps recently taken by the FASB and the ongoing efforts of the FASB staff may lead to significant near-term improvements.

Organizations should continue to watch for further developments as the FASB works through the tax accounting topics along with those which will be considered in the Disclosure Framework Project.

Let's talk

For a deeper discussion of how the FASB actions may affect your business, please contact:

Tax Accounting Services

David Wiseman
+1-(617)-530-7274
david.wiseman@us.pwc.com
Edward Abahoonie
+1-(973)-236-4448
edward.abahoonie@us.pwc.com
John Schmitt
+1-(312)-298-3272
john.schmitt@us.pwc.com