I was planning to blog more about ASU 2016-09 this week, but the FASB’s Private Company Council discussed accounting for awards granted to nonemployees at their meeting on Tuesday, so I’ve decided to blog about that instead. While the changes the FASB is considering in this area may have their genesis in simplifying things for private companies, they ultimately would apply to both private and public companies, so it’s worth reading about the meeting even for public companies.
What the Heck is the PCC?
The Private Company Council is the primary advisory body to the FASB on private company matters.
Good News
There were two bits of good news. The first is that the FASB staff recommends aligning the treatment of awards granted to nonemployees with the treatment of employee awards. Moreover, their recommendation is for awards to all nonemployees, not just nonemployees providing similar services as employees (which the staff seemed to recognize would be a bit of a rat’s nest to figure out).
Secondly, overall, the PCC generally seemed to agree with the staff’s recommendation. That’s certainly the official position. From the “Media Meeting Recap“:
The PCC generally supported aligning the models for nonemployee and employee share-based payments under GAAP.
Stuff I Found Surprising/Concerning
When I listen to FASB meetings, I often end up shouting at my computer like I am watching a televised sporting event. Here are a few things that got a reaction from me.
I was a little surprised at how unfamiliar the PCC seemed to be with how start-ups use equity awards for nonemployees. One Council member suggested that it seemed to him that accounting for employee awards is harder than accounting for nonemployee awards. For a minute there, I thought he was going to suggest that the treatment of employee awards be aligned with that of nonemployees. Luckily, most of the other Council members did not seem to agree with him.
The Council also was very concerned about companies buying goods (the example tossed about was buildings) with stock. Does this actually happen? Enough that the PCC needs to be so worried about it? I will admit that buying a building with stock is far outside my wheelhouse, so maybe it does happen all the time and maybe there are all sorts of valid concerns over how the transaction is accounted for that justify keeping this situation outside the scope of ASC 718.
Another thing I didn’t know is that the current guidance on accounting for nonemployee awards stipulates that if vesting is contingent on performance conditions, the interim estimates of expense are based on the lowest possible aggregate fair value, which is $0 if the award will be forfeited in full if the performance conditions aren’t met. 1) Who knew? 2) Are companies actually granting performance awards to nonemployees?
The Most Surprising Thing
Only one member of the PCC is located west of the Mississippi, which explains A LOT. (And, in general, all of the FASB advisory groups seem to be heavily weighted towards the east coast, which explains even more.) The one Council member from the west coast is from Portland. Nothing against Portland, but given the proliferation of start-ups here in Silicon Valley, it seems like maybe the FASB ought to find an accounting practitioner from this area who works with starts-up to be on the Council. Equity compensation can’t be the only area where technology start-ups do things differently.
This week I provide additional coverage of the decisions the FASB made on the ASC 718 simplification project (see my blog from last week for Part 1).
Cash Flow Statement
The Board affirmed both of the proposals related to the cash flow statement: cash flows related to excess tax benefits will be reported as an operating activity and cash outflow as a result of share withholding will be reported as a financing activity. Nothing particularly exciting about either of these decisions but, hey, now you know.
Repurchase Features
The board decided not to go forward with the proposal on repurchases that are contingent on an event within the employee’s control. The proposal would have allowed equity treatment until the event becomes probable of occurring (which would align with the treatment of repurchases where the event is outside the employee’s control). The Board decided to reconsider this as part of a future project. The Board noted that this would have required the company to assess whether or not employees are likely to take whatever action would trigger the repurchase obligation, which might not be so simple to figure out (we all know how hard it is to predict/explain employee behavior).
Practical Expedient for Private Companies
The Board affirmed the decision to provide a simplified approach to determining expected term for private companies, but modified it to allow the approach to be used for performance awards with an explicitly stated performance period. I’m not sure that many private companies are granting performance-based stock options, but the few who are will be relieved about this, I’m sure.
Options Exercisable for an Extended Period After Termination
Companies that provide an extended period to exercise stock options after retirement, disability, death, etc., will be relieved to know that the FASB affirmed its decision to eliminate the requirement that these options should be subject to other applicable GAAP. This requirement was indefinitely deferred, but now we don’t have to worry about it at all.
Last week, I blogged about the proposed amendments to ASC 718. This week, I have some more information about them.
Is This a Done Deal?
Pretty much. The FASB has already considered—and rejected—a number of different alternatives on most of these issues. My understanding is that there was consensus among Board members as to each of the amendments and most of the changes aren’t really controversial, so we don’t expect there to be much debate about them.
Tax accounting is an exception, of course. This change is very controversial; in fact, the FASB considered this approach back when they originally drafted FAS 123(R) and ultimately rejected it is because of the volatility it introduces to the income statement. So perhaps there will be some opposition to this change.
What’s the Next Step?
The FASB will issue an exposure draft with the text of the changes, then will solicit comments, make changes as necessary, and issue the final amendments. I have hopes that we’ll see an exposure draft by the end of the year, with possibly the final amendments issued in the first half of next year.
ASC 718(R)?
No, the new standard will not be called “ASC 718(R),” nor will the amendments be a separate document. That’s the advantage of Codification. The amendments will be incorporated into existing ASC 718, just as if they had been there all along. In a few years, you may forget that we ever did things differently.
What’s the Next Project?
This isn’t the FASB’s last word on ASC 718. They have a number of additional research projects that could result in further amendments to the standard:
Non-Employees: In my opinion, the most exciting research project relates to the treatment of non-employees. As I’m sure you know, it is a big pain to grant awards to consultants, et. al., because the awards are subject to liability treatment until vested. The FASB is considering whether consultants should be included within the scope of ASC 718, with awards to them accounted for in the same manner as employee awards. If not for all consultants, than at least for those that perform services similar to that of employees.
Private Companies: Another research project covers a number of issues that impact private companies, such as 1) practical expedients related to intrinsic value, expected term, and formula value plans and 2) the impact of certain features, such as repurchase features, on the classification of awards as a liability or equity.
Unresolved Performance Conditions: Another project relates to awards with unresolved performance conditions. I’ll admit that I’m not entirely sure what this is.
That’s All, For Now
That’s all I have on this topic for now. You can expect more updates when we hear more news on this from the FASB.
A big thank-you to Ken Stoler and Nicole Berman of PwC for helping me sort through the FASB’s announcement. If you haven’t already, be sure to check out their Equity Expert Podcast on the amendments.
On April 30, the FASB’s Small Business Advisory Committee (SBAC) met to discuss whether the Private Company Council (PCC) should add the topic of stock plan accounting to their agenda. I listened to the whole discussion–even the parts that were hard to hear–so I figure I’m due a blog entry out of it.
Background
Some of you may recall that, back in February of last year, I blogged about the FASB forming a special group to review whether exceptions or modifications for private companies should be made to GAAP (“A Different Standard for Private Companies,” February 7, 2012). At the time, the name of the group was the Private Company Standards Improvement Council. It’s not quite clear how we got from there to here (maybe FASB didn’t like the fact that everyone would probably pronounce the acronym “pic-sic”), but the PCC seems to be the current iteration of that group.
The SBAC provides a forum for the small business community to share ideas, experiences, etc. with the FASB. The PCC is considering taking up the topic of stock plan accounting–specifically, should the requirements of ASC 718 be modified for private companies or should private companies be exempt from some of the requirements–and asked the SBAC to discuss whether this is a big enough issue for small companies that they (the PCC) should add it to their agenda.
The SBAC Discussion
The FASB, in preparation for the meeting, and the committee did identify a number of concerns for private companies, including:
Valuation of underlying stock and valuation of options can both be difficult and costly.
The required disclosures may be onerous for private companies.
It can be difficult for private companies to interpret and apply the relevant accounting principles without help from paid advisors and there are probably lots of tedious rules that private companies aren’t aware of.
It can be difficult for private companies to determine whether awards are subject to equity or liability treatment due to various redemption provisions that are often utilized by them (e.g., rights of first refusal, repurchase rights, etc.).
The accounting implications of awards issued by private companies don’t really become relevant until a CIC and equity awards could be viewed as a cost to the ultimate buyer, rather than a cost to the issuing company.
Despite these concerns, I was surprised to note that the SBAC wasn’t terribly sympathetic to the idea of carving out some exceptions for private companies. The committee seemed skeptical of how widespread usage of stock compensation is among private companies. Some committee members supported the idea of further research into the level of usage; other members simply didn’t believe that enough private companies offered stock compensation to make the topic worthy of the PCC’s time. Also, some committee members felt that because offering stock compensation is optional, those private companies that offer it should be prepared to devote the resources necessary to account for it correctly.
Interestingly, the committee seemed most concerned about the disclosures. This was a surprise to me because I didn’t think private companies even bothered with the disclosures, given that their financial statements aren’t filed with the SEC. The committee spent so much time talking about the disclosures that I started to think maybe it was a separate agenda item (it wasn’t–I checked). They suggested that for both small public companies and private companies it would be helpful if FASB provided more assistance related to the disclosures, including possibly providing a checklist of annual vs. quarterly and public vs. private disclosures. Coincidentally, in preparing for my session, “Alphabet Soup: 10-K, 10-Q, S-K, Where Does Your Stock Plan Info Go? And Why Should You Care?,” Carrie, Elizabeth, and I had just been discussing the confusion over what information companies are supposed to include in their quarterly disclosures.
The recording of the SBAC meeting is no longer available, but you can access the meeting handouts, which include some of the feedback from SBAC members.