FASB decides to propose changes to stock compensation tax

Tax Insights
from Tax Accounting Services
FASB decides to propose changes to
stock compensation tax accounting
February 2015
In brief
During its decision-making meeting on February 4, 2015, the FASB (“Board”) agreed to issue an
exposure draft proposing revisions to various guidance in the stock compensation standard. Among the
proposed revisions are the following revisions related to income taxes:
Recognition of all excess tax benefits (“windfalls”) and deficiencies (‘shortfalls”) within income tax
expense and elimination of the requirement that cash taxes payable be reduced in order to record a
windfall tax benefit, and
Elimination of the requirement to display the gross amount of windfalls as an operating outflow and
financing inflow in the statement of cash flows.
The Board directed the FASB staff to prepare an exposure draft in order to solicit broad stakeholder
input. The draft is expected to be issued in April/May 2015. Stakeholders will have the opportunity to
provide feedback during a 60-day comment letter period.
In detail
On February 4, 2015, the FASB
held a decision-making meeting
with the purpose of deciding on
whether to issue an exposure
draft related to potential
improvements and
simplifications to the current
accounting for stock-based
compensation. The changes
include certain broadly
applicable areas of income tax
accounting. The Board voted on
various items throughout the
meeting including the changes
to be proposed, transition
methods, transition disclosures
and effective dates.
The impetus for the
consideration of these topics
came from several sources. For
more information, please refer
to our recent TAS publication
covering the October agenda
prioritization meeting FASB
adds stock compensation tax
accounting topics to its agenda.
income tax accounting changes
related to a stock-based
After conducting research as
directed by the Board, the FASB
staff presented the Board with
specific recommendations for
improving tax accounting for
stock-based compensation. The
Board voted to include two
Tax Insights
Changes being proposed
The first proposed change will require
the recognition of all windfalls and
shortfalls within income tax expense.
(Windfalls occur when a stock-based
award results in a larger tax deduction
than the amount of compensation
recorded for book purposes, whereas
shortfalls occur when the award
results in zero or less of a tax
deduction than the related book
charge.) This would replace the
current guidance which records
windfalls in equity and allocates the
tax effects of shortfalls between equity
and income tax expense.
The FASB staff noted the change
would eliminate the necessity of
maintaining a windfall “pool” and the
potential asymmetry in the
classification of tax effects. The
change included the staff’s
recommendation to remove the
current requirement that cash taxes
payable must be reduced in order to
record a windfall. The staff had also
considered potential convergence with
IFRS but concluded that convergence
would not result in simplification.
exposure draft before deciding on the
effective date.
The second proposed change
eliminates the current requirement to
display the gross amount of windfalls
as an operating outflow and financing
inflow in the cash flow statement. The
FASB staff noted that this
presentation does not reflect actual
cash flows, and represents the only
exception from single-line
presentation of taxes within operating
cash flows.
The takeaway
The exposure draft will propose
prospective application of the
windfalls/shortfalls change, and
modified retrospective transition (i.e.,
cumulative catch-up adjustment) for
the elimination of the cash taxes
payable requirement for windfalls.
Retrospective application will be
proposed for the change in the
presentation of windfalls in the cash
flows statement.
There are also other tax accounting
standard setting developments, as the
FASB issued an exposure draft in
January related to two other widely
relevant tax accounting topics. Please
refer to our recent publication for
more information FASB proposes two
ASUs on income taxes as part of
simplification initiative. Income
taxes are also included in the
Disclosure Framework project and the
FASB staff continues to study
intraperiod tax allocation.
The Board decided to wait until
comments are received on the
The steps recently taken by the FASB
and the ongoing efforts of the FASB
staff are intended to reduce the
complexity of accounting for income
taxes. Organizations should be giving
attention to the implications of the
changes being proposed in these tax
accounting areas. Consideration
should be given to responding to the
exposure draft once it is issued.
Let’s talk
For a deeper discussion of how the FASB actions may affect your business, please contact:
Tax Accounting Services
David Wiseman, Partner
US Tax Accounting Services Leader
+1 (617) 530-7274
[email protected]
Edward Abahoonie, Partner
Tax Accounting Services Technical Leader
+1 (973) 236-4448
[email protected]
Kyle Quigley, Director
US Tax Accounting Services
+1 (973) 236-7843
[email protected]
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