Tax Accounting for Stock Compensation
FASB issued ASU 2016-09 simplifying accounting for stock based compensation under ASC 718. The amendments are effective for annual periods beginning after December 15, 2016 for public entities and after December 15, 2017 for all other entities. Early adoption is permitted. Our discussion will be focused on tax accounting aspect as summarized below:
Previously, reporting entities were subject to complex rules in accounting for the differences in tax deductions resulting from the exercise of stock compensations and how they were accounted for in the income statement. The rules under ASC 718 required reporting entities to track APIC pool, determining excess benefit and short-falls, and were required to consider recognition threshold for excess benefits (causing significant difference in book and tax attributes in certain situations). However, the amendments significantly simplify the accounting for share based compensation.
Under the amendments, reporting entities treat the tax effects of exercised or vested award as discrete items in the reporting period in which they occur, and recognize excess tax benefits and short-falls through income statement without regard to the APIC pool and regardless of whether the benefit reduces taxes payable. Accordingly, reporting entities are no longer required to maintain APIC pool.
Reporting entities shall apply the amendments on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period, and disclose the nature of and reason for the change in accounting principle and the cumulative effect of the change on retained earnings or other components of financial statements. Under the modified retrospective transition method, reporting entities will apply the overall amendments on a prospective basis and recognize previously unrecognized excess tax benefits as cumulative adjustment to retained earnings.
Please refer to the ASU 2016-09 for further detail.