Since the Financial Accounting Standards Board (FASB) proposed its FAS 123 standard on equity compensation accounting in 1995, the details of implementing the rule have only increased in complexity. At the end of March this year, the FASB modified some aspects of the renamed ASC 718 standard to bring consistency and clarity to some outstanding issues. In addition, it reduces the burden in complying with the required calculations for equity compensation accounting. ​

These changes are effective for fiscal years after December 15, which means that companies on a calendar year will have to incorporate these changes by the first quarter of 2017. Here's a short summary of the effects of these changes on public companies.


Tax Accounting

One of the most welcome pieces of news was the elimination of the "APIC Pool," which was an off-balance-sheet account tracking tax benefits and deficiencies over time. A benefit to the company would occur when an option was exercised at a price higher than its accounting value at grant, and a deficiency would result if the opposite were true. These changes were booked to the APIC Pool until the balance was zero and then to tax expense.


The FASB has simplified this calculation by eliminating the APIC Pool. There will usually be a difference between the expected tax benefit estimated on grant date and its actual value when realized. Going forward, these differences will be credited (if positive) or debited (if negative) to the tax expense account. The FASB has categorized this change as "prospective," which means that no restatement of prior year financial statements is necessary to account for this change.


A side benefit of this rule is the elimination of the requirement to calculate the effect of any windfall tax benefits on diluted earnings per share. Now, any assumed proceeds from equity awards are calculated solely from the exercise price and average unamortized expense.



Under the prior rule, companies were required to estimate the percentage of employees who would forfeit their equity awards over the vesting period when determining the expense. This was required in order to record quarterly expense as accurately as possible, tying it to the likelihood of an award vesting. This estimate would then have to be "trued up" to actual experience, resulting in an adjustment that increased or decreased compensation expense. Estimating forfeitures is somewhat arbitrary for new companies with no employee turnover history.


The FASB now offers employers a choice to either estimate forfeitures and then true-up to actual experience or to record forfeitures as they occur and reduce ongoing expense at that time. In either case, once awards vest there is no further adjustment. For companies that will cease estimating forfeitures, this will require a catch-up adjustment in the current period with no restatement of prior period financials.


Minimum Statutory Withholding

Most equity awards are considered compensation income when realized, whether at exercise of stock options or vesting of restricted stock. Some companies choose to withhold shares to cover the payroll tax liabilities rather than allowing participants to sell shares in the open market. While this choice helps manage dilution of the stock, in the past, FASB restricted any share withholding to the minimum statutory rates for the exercise. Otherwise, the award would be classified as a liability instrument with negative accounting implications. Determining these minimum rates was a difficult task, especially for global companies.


Fortunately, in ASU 2016-09, the FASB now allows companies to withhold shares at the maximum statutory payroll rates applicable to the participant, without a risk that the award will be classified as a liability instrument.


As with all regulatory and accounting issues, Computershare recommends that you consult with qualified auditors and accountants as to the details of implementing these changes. We will also be incorporating all these changes in our own financial reporting tool.


Andrew Schwartz (CEP, CPA), has more than 12 years of experience with the administration and taxation of equity compensation.