Finance chiefs will soon have an easier time accounting for stock-based employee compensation.
The Financial Accountant Standards Board simplified U.S. accounting rules on how companies account for employee stock awards on March, 30, 2016.
Under the amended rules, businesses must record discrepancies between tax accounting and financial reporting related to equity compensation on the income statement. Currently this information only appears on balance sheets, and is shifted to income statements in specific situations.
For public companies, the amended rule goes into effect for fiscal tears beginning after Dec. 15.For private companies, the rule goes into effect after Dec. 15, 2017.
Recommendations for the rule change came from both public and private company stakeholders, stating that the current rules are too complex.
FASB chairman Russel Golden said in a written statement, “Based on input from those stakeholders – including the Private Company Council – the FASB has issued a standard that they believe will simplify the accounting while maintaining the usefulness of information provided to investors.
According to the details released by the FASB, equity awards exercised or vested should be treated as discrete items during the reporting period in which they occur. Businesses should also recognize tax benefits regardless of whether the benefit reduces taxes payable in the current period.
In addition, private companies can apply a “practical expedient” formula for estimating the expected term of a greater range of equity awards linked to performance or service. In the past this rule was solely applied to stock options.
The FASB also said that some private company were unaware they could choose to measure liability-classified awards using either the fair value or intrinsic value approach. The U.S. accounting standard setter said firms can now make a one-time change to their accounting policy.