In today’s blog entry, I provide a summary of the NASPP’s comment letter on the FASB’s proposed accounting standards update (ASU) on ASC 718.

[This blog entry won’t make any sense if you aren’t at least minimally familiar with the proposed ASU.  For a summary of the proposal, see the NASPP Alert “FASB Issues Exposure Draft of ASC 718 Amendments” and my June 9 blog entry “It’s Here! The FASB’s Amendments to ASC 718.”]

Tax Accounting

This is the most controversial aspect of the exposure draft.  The volatility that this change introduces to the P&L is likely to be significant for companies that rely heavily on stock compensation.  We performed a very quick analysis of a handful of companies and found that, for several of them, recognizing excess tax benefits in their P&L would have increased EPS by 10%. In one case, EPS increased by 60%. Ultimately, we think this will be incredibly confusing to investors and other financial statement users.  We also feel that it is highly unintuitive for changes in a company’s stock price to generate significant profits and losses for the company.  While eliminating the ASC 718 APIC pool is very attractive, ultimately, we felt that the impact on earnings and effective tax rates would offset the benefits of simplifying this area of the standard. Because of this, we recommended against this amendment.

We suggested that companies record all excess tax benefits and shortfalls to paid-in capital, rather than tax expense. This would eliminate the need to track the APIC pool without impacting the P&L.

Forfeitures

We supported the proposal to allow companies to make a policy election to account for forfeitures as they occur. Our only comment on this topic was to suggest that the FASB provide a mechanism for companies to change their election without treating it as a change in accounting principle (which requires a preferability assessment and retrospective restatement).

Share Withholding

We supported the proposal to amend the standard to provide that shares can be withheld to cover taxes up to the maximum individual tax rate without triggering liability treatment.

We asked the FASB to provide additional guidance on how this requirement applies to mobile employees and suggested that share withholding be allowed up to the combined maximum tax rate in all jurisdictions that the transaction is subject to.

We also asked the FASB to remove the requirement that the tax withholding be mandated by law.

Practical Expedient to Expected Term

We supported allowing private companies to treat the midpoint of the vesting period and contractual term of an option as the option’s expected term for valuation purposes.  We asked the FASB to remove the condition that the option be exercisable for only a short period of time after termination of employment and also requested removal of the conditions applicable to performance-based options.

The Rest of It and Thanks

We supported the remaining proposals in the exposure draft without comment.

Thanks to everyone that completed the NASPP’s quick survey on the exposure draft—I hope to have the results posted by the end of this week.

Thanks also to individuals who agreed to serve on our task force for this project:  Terry Adamson of Aon Hewitt, Dee Crosby of the CEP Institute, Elizabeth Dodge of SOS, Sean Kelly of Morgan Stanley, Ken Stoler of PwC, Sean Waters of Fidelity, Thomas Welk of Cooley, and Jason Zellmer of Bank of America Merrill Lynch. Their help was invaluable.

Read the NASPP’s comment letter.

– Barbara