Financial Reporting for Taxes
TA: Equity Compensation Dissecting ASU 2016-09
Paul Rasmussen
Sandy Shurin
Deloitte Tax LLP
Agenda
Introduction
5 min
Current and New Guidance
20 min
FAQs
25 min
Share-Based Payments – Sample Disclosure
5 min
Course Conclusion
5 min
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1
Introduction
Learning Objectives
Upon completion the learner will be able to:
• Explain the changes in accounting for income taxes in ASU 2016-09
• Discuss the potential impact of ASU 2016-09 with your clients
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Old and New Guidance
Tax Accounting for SBC Prior to ASU 2016-09
Excess Deductions
ASC 718-20-55-20 (aka FN 82 of FAS 123(R)) requires the tax benefit of
the excess tax deduction to be realized by reducing taxes payable
prior to being credited to paid-in-capital. The implementation Resource
Group concluded that two methods were acceptable:
• With and without ordering
• Tax law ordering
Tax attributes (tax loss and tax credit carryforwards) attributed to
excess tax deductions had to be tracked “off balance sheet”
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Tax Accounting for SBC Prior to ASU 2016-09
Excess Deductions (cont.)
Once an excess tax deduction is realized (based on the ordering method adopted
by the company) the tax benefit of the excess deduction has to be measured.
Again, the Resource Group concluded that more than one method would be
acceptable:
• Direct tax effect of the excess tax deduction (at the marginal tax rate)
• Determine taxes payable with and without the excess tax deduction
• Total tax effect of the total deduction (FV and excess) determined on a with and
without basis less the DTA recognized on the FV amount
Once the benefit is considered realized and has been measured, current tax
expense is increased by that amount and paid-in-capital is increased by the same
amount. The cash flows statement is required to be prepared in a consistent
manner (as if a greater amount of tax was paid and then contributed back to
equity).
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Tax Accounting for SBC Prior to ASU 2016-09
Shortfall
DTAs not realized (when the tax deduction is less than the book
expense) can be written-off to the APIC pool
• Only applicable when there is an APIC pool (a memorandum account
of prior realized excess tax benefits not previously offset by prior
shortfalls)
• Write-off to APIC (the memorandum account) is done net of VA (so
important to allocate the VA to DTAs prior to considering)
• There has even been differences of opinion between practitioners
regarding whether an excess tax benefit had to be realized and
credited to the APIC pool prior to being used to offset a shortfall
related tax expense (i.e., were shortfalls and excess deductions
accounted for individually or in aggregate)
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Share-Based Payments
ASU 2016-09 (issued March 30, 2016)
Description
Old
New
Excess tax
benefits –
intraperiod
allocation
Realized benefits of tax return deductions in excess of
compensation cost recognized are accounted for as a
credit to additional paid-in capital
All excess tax benefits and tax deficiencies are to be
recognized within the income statement, thus
eliminating the concept of “APIC pool” (ASC 718-74035-2)
Excess tax
benefits – EPS
Excess tax benefits/deficiencies are included in
calculation of assumed proceeds available to
repurchase shares
Dilutive EPS (Treasury Stock Method) – Excess tax
benefits/tax deficiencies are excluded from calculation
of assumed proceeds available to repurchase shares
Realization
A tax benefit and a credit to additional paid-in capital
for the excess deduction would not be recognized until
that deduction reduces taxes payable
Excess tax benefits are recognized regardless of
whether the benefit reduces taxes payable in the
current period
Cash flow
Present excess tax benefits as a cash inflow from
financing activities and a cash outflow from operating
activities
Excess tax benefits are not presented separately from
other income tax cash flows and, thus, classified
along with other cash flows as an operating activity
Interim
N/A for excess benefits
Excess tax benefits or deficiencies are discrete items
in the interim reporting period in which they occur
(i.e., not considered in AETR) (ASC 740-270-30-4)
Forfeitures
Compensation cost accruals are based upon an
estimate of the number of awards that are expected
to vest
An entity can elect to continue to account for
forfeitures based upon an estimate of the number of
awards that are expected to vest, or can account for
forfeitures when they occur.
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Share-Based Payments
ASU-2016-09 (issued March 30, 2016) (cont.)
Transition guidance - Accounting for income taxes
• Excess tax benefits and deficiencies – Prospective (ASC 718-10-65-4(e)(1))
• Previously unrecognized excess tax benefits – Modified retrospective (retained
earnings) (ASC 718-10-65-4(e)(2))
• Cash flow statement presentation – Prospective or retrospective
(ASC 718-10-65-5)
Effective date
• Public entities – annual periods, including interim periods within those annual
periods, beginning after December 15, 2016
• Non-public entities – one year later
• Early adoption is permitted; if elected in an interim period, any adjustments
should be reflected as of the beginning of the annual period that includes that
interim period
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ASU 2016-09
APIC (current accounting) vs. Tax Expense (new accounting)
Company A grants a nonqualified stock option
• $30 fair value, fully vested at grant date in 20X1
• Strike price equals market price on date of grant = $40
• 40% tax rate
• $80 share price upon exercise in 20X2
As a result of the grant and exercise of the NQSO, Company A recognizes the following
income tax expense/(benefits) and APIC impact:
Old Guidance
New Guidance
20X1 – Income Tax Expense/(Benefit)
($ 12)
($ 12)
20X1 – SBC DTA
$ 12
$ 12
20X2 – SBC DTA
($ 12)
($ 12)
$0
($ 4)
($ 4)
N/A
20X2 – Income Tax Expense/(Benefit)
20X2 – APIC
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ASU 2016-09
FN 82 (realization of taxes payable) Eliminated
Company A grants a nonqualified stock option
• $30 fair value, fully vested at grant date in 20X1
• Strike price equals market price on date of grant = $40
• 40% tax rate
• $80 share price upon exercise in 20X2
Company A is in a NOL in 20X2 and the NOL is greater than $10
As a result of the grant and exercise of the NQSO, Company A recognizes the following income tax
expense/(benefits) and NOL DTA:
Old Guidance
New Guidance
($ 12)
($ 12)
20X1 – SBC DTA
$ 12
$ 12
20X2 – SBC DTA
($ 12)
($ 12)
20X1 – Income Tax Expense/(Benefit)
20X2 – Income Tax Expense/(Benefit)
$
20X2 – NOL DTA
$ 12
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0
($
4)
$ 16
11
ASU 2016-09
FN 82 (realization of taxes payable) Eliminated (cont.)
Transition Entry – if adopted in 20X3
20X3 – Retained earnings
20X3 – NOL DTA
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($
4)
$
4
12
ASU 2016-09
Cash Flows Statement (present accounting vs. new accounting)
Company ABC
Consolidated Statement of Cash Flows
20X3
Old Accounting
Cash and cash equivalents, beginning of period
New Accounting
$ 8,000
$ 8,000
Net income (loss)
200
200
Changes in accruals and reserves
100
100
Excess tax benefits from stock-based compensation
(80)
-
(3,300)
(3,300)
80
-
Net increase(decrease) in cash/cash equivalents
(3,000)
(3,000)
Cash and cash equivalents, end of period
$ 5,000
$ 5,000
Operating activities:
Investing activities:
Purchase of property and equipment
Financing activities:
Excess tax benefits from stock-based compensation
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ASU 2016-09
Cash Flows Statement (new guidance)
> > Cash Flows from Financing Activities
230-10-45-15 All of the following are cash outflows for financing
activities:
a. Payments of dividends or other distributions to owners, including
outlays to reacquire the entity’s equity instruments. Cash paid to a tax
authority by an employer when withholding shares from an employee’s
award for tax-withholding purposes shall be considered an outlay to
reacquire the entity’s equity instruments.
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FAQs
ASU 2016-09: Frequently Asked Questions
FAQ #1
Question
If excess tax deductions and shortfalls impact tax expense, should they
be forecasted for purposes of the AETR?
Answer:
No - the ASU specifically says that the tax expense or tax benefit related
to an excess tax deduction or shortfall should be recognized in the
interim period that it occurs in.
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ASU 2016-09: Frequently Asked Questions
FAQ #2
Question
How does an entity determine the amount of the discrete item related to
excess tax benefits or tax deficiencies?
Answer:
Historically, for intraperiod allocation considerations, the following three
approaches have been generally accepted for the calculation of the tax
effects of excess tax benefits and tax deficiencies:
• Direct effect — Difference between (1) the actual tax deduction
multiplied by the applicable tax rate (i.e., excludes indirect effects)
and (2) the deferred tax asset recognized.
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ASU 2016-09: Frequently Asked Questions
FAQ #2 – Answer (cont.)
Answer:
• Full ASC 740 “with-and-without” — Difference between (1) the entire
incremental tax effect (i.e., includes indirect effects) of the actual tax deduction
and (2) the entire incremental tax effect of the cumulative amount of
compensation costs recognized for book purposes as if it were the actual tax
deduction.
• Entire incremental effect — Difference between (1) the entire incremental tax
effect (i.e., includes indirect effects) of the actual deduction and (2) the
deferred tax asset recognized.
These approaches would continue to be appropriate for determining the amount
of excess tax benefits or tax deficiencies to be recognized in the financial
statements after the effective date of the adoption.
Note: The approach chosen is treated as an accounting policy decision and should
be applied consistently.
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ASU 2016-09: Frequently Asked Questions
FAQ #2 Example
Facts:
• Company forecasts pre-tax income of $1,000 for the year and has YTD income
of $200
• Company previously recognized $200 of stock-based compensation (“SBC”) for
which a DTA of $80 was recorded (assume a 40% tax rate)
• In the CY, the Company has a deduction for SBC of $300 which results in an
excess tax deduction of $100
• The Company generates an R&D credit inclusive of $110 which is made up of
the following:
− $80 related to non-SBC qualifying expenditures
− $20 related to historical SBC expenses
− $10 related to excess tax deductions
Question
• For interim purposes, how should the excess tax benefit be measured?
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ASU 2016-09: Frequently Asked Questions
FAQ #2 – Example (cont.)
Answer:
Description
Forecasted Pre-tax Income
Tax Rate
Tax Expense Before R&D Credit
R&D Credit
Total Tax Expense
AETR
YTD Income
YTD Expense
Excess Tax Benefit
Excess Tax Benefit – R&D
Credit
YTD Tax Expense
Effective Tax Rate
Full ASC 740 “Withand-without”
$1,000
$1,000
40%
40%
Direct effect
Entire incremental
effect
$1,000
40%
$400
$400
$400
($110)
$290
29%
($100)
$300
30%
($80)
$320
32%
$200
$58
($40)
$200
$60
($40)
$200
$64
($70)*
$0
($10)
$0
$18
9%
$10
5%
($6)
(3%)
Excess Tax Benefit = Total incremental benefit of $150 (direct incremental benefit** + indirect incremental benefit***) less DTA
recognized of $80
** Direct incremental benefit = $120 ($300 x 40%)
***Indirect incremental benefit = $30 (total R&D credit of $110 less $80 of credit without SBC)
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ASU 2016-09: Frequently Asked Questions
FAQ #3
Question
May an entity change its accounting policy and approach (see question 2
above) for determining the discrete amount related to excess tax
benefits and tax deficiencies upon the adoption of ASU 2016-09?
Answer:
Yes. Given the lack of definitive guidance on this topic in ASU 2016-09,
upon adoption entities may choose a new policy and approach for
determining the amount related to excess tax benefits and tax
deficiencies. Entities should consistently apply that approach after
adoption
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ASU 2016-09: Frequently Asked Questions
FAQ #4
Question
How does a company transition from the prior accounting guidance to
the new accounting guidance?
Answer:
As it relates to the elimination of FN 82 (no benefit until realized as a
reduction in taxes payable) that is adopted on a modified retrospective
basis as of the beginning of the year of adoption (either 2016 or 2017).
As it relates to the tax effects of excess tax deduction and shortfalls
being recognized in tax expense, that change is prospective and would
start applying in the year of adoption and would apply to each interim
period within that year.
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ASU 2016-09: Frequently Asked Questions
FAQ #5
Question
If the DTA recognized upon adoption (i.e., as part of the modified
retrospective transition entry) is offset by a valuation allowance, does
the recognition of the valuation allowance increase tax expense?
Answer:
No, if a valuation allowance is required for the DTA recognized in the
"modified retrospective transition" entry, the balancing entry to retained
earnings is adjusted.
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ASU 2016-09: Frequently Asked Questions
FAQ #6
Question
:
Can
a company early adopt in an interim period other than its first fiscal
quarter?
Answer:
Yes. ASU 2016-09 permits companies to early adopt in any interim or
annual period for financial statements that have not been issued or have
not been made available for issuance. The modified retrospective entry
(DTA/VA/RE) would still be determined as of the start of the year and
any application of the current accounting in prior interim periods would
be "replaced" with accounting under the new guidance (i.e., debits or
credits recognized in APIC would now be recognized in tax expense).
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ASU 2016-09: Frequently Asked Questions
FAQ #7
Question
:
Can
a company just adopt the tax elements of the ASU in 2016 and the
remainder of the ASU in 2017?
Answer:
No. If a company adopts the ASU, it must adopt the ASU in its entirety.
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ASU 2016-09: Frequently Asked Questions
FAQ #8
Facts:
•
Prior to adopting ASU 2016-09, the Company has the following:
− $100 UTB liability related to its meals and entertainment expenses
− $500 of R&D credits all of which are off-balance sheet (i.e., attributable to
excess tax benefits)
•
40% tax rate
Question
Should the DTA recognized from adopting the ASU be considered when
applying ASU 2013-11?
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ASU 2016-09: Frequently Asked Questions
FAQ #8 (cont.)
Answer:
Yes, after the DTA is recognized, a UTB that would not be payable but rather
reduce the DTA recognized in the transition entry should be offset against the DTA
after the DTA has been recognized as an increase in retained earnings. Further,
such UTBs should be considered as part of the assessment of the realizability of
the DTA being recognized.
• Upon adoption, the Company will record the following to recognize the
previously unrecognized excess tax benefits
Dr: Deferred tax asset $500
Cr: Retained Earnings ($500)
• The Company will net the UTB liability of $100 against its DTA for R&D credits
(pursuant to ASC 740-10-45-10A) as follows:
Dr: UTB Liability $100
Cr: Deferred tax asset ($100)
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ASU 2016-09: Frequently Asked Questions
FAQ #9
Question
Can the other provisions of the ASU have an income tax accounting
impact?
Answer:
Yes, one example is if a company elects to account for forfeitures as
they occur, that may result in an adjustment to the cumulative book
compensation expense recognized to date. The DTA will need to be
remeasured accordingly with the change similarly being recognized in
retained earnings.
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Share-Based Payments – Sample
Disclosure
Share-based payments
Example disclosures ASU 2016-09
Example 1
…XYZ recognized compensation expense of $X million, $X million, and $X million for stock options
during 2016, 2015, and 2014, respectively, which is included within other selling and administrative
expenses in the consolidated statements of operations. Income tax benefits related to stock option
activity during 2016, 2015, and 2014 totaled $X million, $X million, and $X million, respectively. The
2016 income tax benefit related to stock options includes $X million recognized as a result of the
adoption of ASU 2016-09.
Example 2
ASU No 2016-09 "Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting" was issued in March 2016 and early adopted by the Company in
the first quarter of fiscal 2017. ASU No 2016-09 eliminates additional paid in capital ("APIC") pools
and requires excess tax benefits and tax deficiencies to be recorded in the income statement when
the awards vest or are settled. This requirement is to be adopted prospectively by the Company. The
impact of this section of the standard was a benefit of $X to income tax expense for the first quarter
of fiscal 2017. In addition, the ASU requires that the excess tax benefit be removed from the overall
calculation of diluted shares. The impact on diluted earnings per share of this adoption was not
material. Finally, modified retrospective adoption of ASC 2016-09 eliminates the requirement that
excess tax benefits be realized (i.e. through a reduction in income taxes payable) before they are
recognized. The adoption of this section had no impact on the financial statements.
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Houston TEI Conference
30
Course Conclusion
Questions?
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32
Speaker Bios
Paul Rasmussen
Sandy Shurin
Tax Senior Manager
Deloitte Tax LLP
Houston, TX
Tax Senior Manager
Deloitte Tax LLP
Houston, TX
Phone +1 713 982 4347
Email: [email protected]
Phone +1 713 982 2163
Email: [email protected]
Relevant Experience
Relevant Experience
Paul is a senior manager in the federal tax practice dedicated to
providing tax provision and compliance services to companies in a
number of different industries. He has provided services to
companies within both the public and private sectors and has
experience with corporate and partnership tax structures. Paul
works on a number of tax provision preparation and attest
engagements covering financial reporting under both US GAAP and
IFRS.
Sandy Shurin is a Senior Manager in Deloitte’s Global Rewards
practice, who primarily focuses on the tax, regulatory and
accounting issues that impact the rewards programs of US and non
US employers. As a global compensation consultant with specialized
experience in the area of long-term incentive plans, Sandy has
assisted public and private companies with the thorough review of
current processes and outstanding equity and non-equity based
awards to identify not only compliance concerns but also
opportunities for tax optimization and operational efficiencies.
Paul also currently serves in a support role within Deloitte Tax LLP’s
Central Region Financial Accounting & Reporting – Income Taxes
Competency group. Paul has been an instructor for internal ASC
740 trainings at both a local and national level.
Education
Paul received a Bachelor of Science degree in Accounting and a
Masters degree in Accounting from Brigham Young University.
Sandy has been a speaker at local, regional and national industry
events on various topic related to global compensation, serves on
the Board of Houston chapter of the National Association of Stock
Plan Professionals (NASPP), and is the incoming Chair of the
American Bar Association (ABA) Section on Taxation Subcommittee
on Executive Compensation, Fringe Benefits and Federal Securities
Issues.
Education
Sandy received a Bachelor of Finance degree from The Pennsylvania
State University and a J.D. from Washington and Lee University
School of Law.
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