It's Here! The FASB's Amendments to ASC 718

The FASB has issued the exposure draft of the proposed amendments to ASC 718.  The FASB alert showed up in my email at approximately 1 PM Pacific yesterday and it's 105 pages long.  Suffice it to say, I haven't exactly read the whole thing yet.  Here are some initial thoughts based on a quick skim of the draft.

Don't remember what the proposed amendments are about? Refresh your memory with my blog entry "Proposed Amendments to ASC 718 – Part I." Also, don't miss the 23rd Annual NASPP Conference, where we will be waxing nostalgic about the first ten years under ASC 718 (FASB Chair Russ Golden is even going to say a few words) and will have special session focused on the steps companies need to take to prepare for the amendments.

I Thought This Was About Simplification

105 pages!  Come on. The whole entire standard including all the illustrations and basis for conclusions was only 286 pages. This "simplification" is over one-third the length of the original standard.

There's More to It Than You Might Think

I've been focusing on just three areas that will be amended, but the exposure draft addresses nine issues.  Two of the issues relate to the classification of stuff on the cash flow statement (snore).  Three relate to private companies—I'll get to these in a subsequent blog entry. And one makes FSP FAS 123(R)-1 permanent, which is a relief.  You will recall that this relates to the treatment of options that provide for an extended time to exercise after termination of employment. Perhaps I wasn't paying attention, but I wasn't aware that the FASB was considering this.

Share Withholding

The proposed amendments relating to share withholding clarify that the company must have a withholding obligation to avoid triggering liability treatment. So share withholding for outside directors and ISOs will still trigger liability treatment.  But, as expected, where the company is obligated to withhold taxes, the proposal allows share withholding for taxes up to the maximum individual tax rate. The proposal doesn't address mobile employees (i.e., can you use the maximum rate out of all of the applicable jurisdictions?) or whether rounding up is permissible if you are withholding at the maximum rate.

Tax Accounting

Also, as expected, the proposal provides that all tax effects will run through the income statement.  What may come as a surprise is that this eliminates the tax benefit under the Treasury Stock Method calculation used for diluted EPS.  Because net earnings (the numerator of EPS) is reduced for the full tax benefit to the company, there won't be any adjustment to the denominator for this benefit anymore.

Expected Forfeitures

For service conditions only, the proposal would allow companies to account for forfeitures as they occur, rather than applying an estimated forfeiture rate to expense accruals. For performance conditions, however, companies will still be required to estimate the likelihood of the condition being achieved.

Comments

Comments on the exposure draft can be submitted using the FASB's Electronic Feedback Form and must be submitted by August 14, 2015.

- Barbara