The Financial Accounting Foundation has completed their post-implementation review of FAS 123(R) (see my August 27, 2013 blog entry, "FAF to Review FAS 123(R)") and the upshot is that they think the standard (now known as ASC 718) needs to be simplified. In response the FASB has proposed some very significant amendments to the standard. In addition to the summary I provide here, be sure to listen to our newest Equity Expert podcast, in which Jenn Namazi discusses the proposed amendments with Ken Stoler and Nicole Berman of PwC.
Currently, ASC 718 provides that withholding for taxes in excess of the statutorily required rate triggers liability treatment. This has been a problem because of rounding considerations (if companies round the shares withheld up to the nearest whole share, does that constitute withholding in excess of the required rate) and, more significantly in jurisdictions (e.g., US states and other countries) that don't have a flat withholding rate. The FASB proposal would change the standard to allow share withholding up to the maximum tax rate in the applicable jurisdiction, regardless of the individual's actual tax rate.
This is obviously great news and would make share withholding a lot more feasible for non-US employees. There is still the question of rounding, however. It also isn't clear how this would apply in the case of mobile employees. Finally, don't forget that, here in the US, the IRS still opposes excess withholding at the federal level (see my January 9, 2013 blog entry "Supplemental Withholding").
Estimating forfeitures is one of the most complicated aspects of ASC 718—I've seen multiple presentations of over an hour in length on just this topic. The FASB has proposed to dispense with this altogether and allow companies to simply recognize the effect of forfeitures as they occur. Companies would be required to make a policy decision as to how they want to recognize forfeitures that would apply to all awards they grant. I assume that this would apply only to forfeitures due to service-related vesting conditions, but I don't know this for certain.
Another area of the standard that has provided a wealth of material for NASPP webcasts and Conference sessions is how companies account for the tax deductions resulting from stock awards. FASB's proposal would change the standard to require that all tax savings and all shortfalls flow through the income statement. If an award results in a deduction in excess of the expense recognized for it, the excess savings would reduce tax expense (currently, the excess is recorded to APIC). Likewise, shortfalls would always increase tax expense (currently, shortfalls are deducted from the company's APIC balance to the extent possible, before reducing tax expense).
With this change, companies would no longer need to track what portion of APIC is attributable to excess tax deductions from stock plan transactions. But this would introduce significant variability into the income statement (which is the reason FASB decided against this approach ten years ago). This approach gets us closer to convergence with IFRS 2, but is still not completely aligned with that standard (in IFRS 2, all excess deductions run through APIC and all shortfalls run through the P&L). But this makes me wonder if companies will simply record the windfall/shortfall tax deductions as they occur, or would they have to estimate the potential outcome and adjust tax expense each period until the deduction is finalized (as under IFRS 2)?
Now? Now They Figure This Out?!
All of these changes will eventually make life under ASC 718 a heck of a lot simpler than it is now. That's the good news. The bad news is that it's really too bad the FASB couldn't have figured this out ten years ago. Not to say "I told you so" but I'm sure there were comment letters on the exposure draft that warned the FASB that the requirements in at least two of these areas were too complicated (I'm sure of this because I drafted one of them).
If you are already thinking wistfully about how much more productively you could have used all that time you spent learning about estimated forfeitures and tax accounting, imagine how your administrative providers must feel. They've spent the last ten years (and a lot of resources) developing functionality to help you comply with these requirements; now they'll have to develop new functionality to comply with the new simpler requirements.
I'll have more thoughts on this and some of the FASB's other decisions—yes, there's more!—next week. For now, check out the PwC and Mercer alerts that we posted to the NASPP website (under "More Information" in our alert, "FASB Proposes Amendments to ASC 718"). And listen to our Equity Expert podcast on the proposed amendments with Ken Stoler and Nicole Berman of PwC.
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