May 4, 2017
Forecasting and Disclosing Tax Effects
One of the primary ways in which ASU 2016-09 changed stock plan accounting practices is to require that all tax effects be recognized in the income statement. Excess tax savings increase earnings (by reducing tax expense) and tax shortfalls reduce earnings (by increasing tax expense). For some companies, this results in a lot of volatility in earnings, earnings per share, and effective tax rates. It also makes it harder to forecast earnings.
The article “Corporate Earnings Guidance Impacted by New Stock Compensation Rules” by PwC reports that companies are trying to forecast the tax effects of stock awards and make disclosures that explain the volatility resulting from the tax effects.
Earnings Per Share
PwC found that some companies are providing detailed commentary on the impact of ASU 2016-09 on earnings per share. Here is a sample disclosure that PwC found:
“[The Company] anticipates fiscal year 2017 diluted EPS from continuing operations to be in the range of $5.38 to $5.58, which includes an expected benefit of about 25 to 30 cents from the adoption of ASU 2016-09. Excluding the benefit of adopting the updated accounting standard, [The Company] anticipates fiscal year 2017 diluted EPS from continuing operations to be in the range of $5.13 to $5.28.”
Effective Tax Rates
PwC found similar disclosures for effective tax rates. From another company:
“We expect an effective tax rate of 26% – 27.5%, after a projected reduction of 350 – 450 basis points related to the implementation of the new accounting standard for the tax benefit of employee share-base compensation.”
Earnings Guidance
Finally, PwC found some companies that had updated previously disclosed earnings and tax rate forecasts:
“[The Company] now anticipates its effective fiscal year 2017 tax rate to be between 32 percent and 33 percent versus its previous assumption of 30 percent and 31 percent, reflecting a 2-point reduction versus year ago compared to the previously assumed 4-point reduction from adopting ASU 2016-09. The company’s updated assumptions for its fiscal year effective tax rate reflect lower than anticipated exercises of [the Company’s] stock options in the first quarter and the company’s revised outlook for full-year stock option exercises. As noted, the company had previously communicated that the benefit to be realized from the adoption of ASU 2016-09 could vary significantly.”
– Barbara