Ref #2017-05
Statutory Accounting Principles (E) Working Group
Maintenance Agenda Submission Form
Form A
Issue: ASU 2016-09: Improvements to Employee Share-Based Payment Accounting
Check (applicable entity):
P/C Life Health
Modification of existing SSAP
New Issue or SSAP
Interpretation
Description of Issue: ASU 2016-09: Improvements to Employee Share-Based Payment Accounting was issued in March 2016 as part of the FASB simplification initiative. The objective of this initiative is to identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of the financial statements.
The areas for simplification involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, the amendments are effective for annual reporting periods beginning after Dec. 15, 2016 and interim reporting periods within those annual periods. (This generally results with a Jan. 1, 2017 effective date.) For all other entities, the amendments are effective for annual periods beginning after Dec. 15, 2017 and interim periods within annual periods beginning after Dec. 15, 2018. (This generally results with a Dec. 31, 2018 effective date, with interim reporting beginning in 2019.) Early adoption is permitted, but if an entity elects to adopt early, all of the amendments must be adopted. The U.S. GAAP guidance specifies either retrospective, prospective or modified retrospective transition separately for each amendment.
1. Accounting for Income Taxes – Current GAAP: Entity must determine for each award whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes results in either an excess tax benefit or a tax deficiency. Excess tax benefits are recognized in additional paid-in capital, tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement. Excess tax benefits are not recognized until the deduction reduces taxes payable. Simplification: All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.
2. Classification of Excess Tax Benefits to the Statement of Cash Flows – Current GAAP: Excess tax benefits must be separated from other income tax cash flows and classified as a financing activity. Simplification: Excess tax benefits should be classified along with other income tax cash flows as an operating activity.
3. Forfeitures – Current GAAP: Accruals of compensation cost are based on the number of awards that are expected to vest. Simplification: An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur.
4. Minimum Statutory Tax Withholding Requirements – Current GAAP: One of the requirements for an award to qualify for equity classification is that an entity cannot partially settle the award in cash in excess of the employer’s minimum statutory withholding requirements. Simplification: The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions.
5. Classification of Employee Taxes Paid on the Statement of Cash Flows When an Employers Withholds Shares for Tax-Withholding Purposes – Current GAAP: There is no guidance on classification of cash paid by an employer to the taxing authorities when directly withholding shares for tax-withholding purposes. Simplification: Cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity.
6. Practical Expedient - Expected Term – Current GAAP: Entities are required to estimate the period of time that an option will be outstanding. Simplification: A nonpublic entity can make an accounting policy election to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that meet certain conditions.
7. Intrinsic Value – Current GAAP: At initial adoption of Topic 718, Compensation—Stock Compensation, nonpublic entities were provided an option to measure all liability-classified awards at intrinsic value. Some nonpublic entities were not aware of that option. Simplification: A nonpublic entity can make a one-time accounting policy election to switch from measuring all liability-classified awards at fair value to intrinsic value.
Existing Authoritative Literature:
SSAP No. 104R—Share-Based Payments provides the related statutory accounting guidance. This Statement has predominantly adopted, with modification U.S. GAAP guidance as detailed below:
144. This statement adopts ASU 2014-12, Compensation – Stock Compensation, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12) with an effective date of January 1, 2016, with early adoption permitted. ASU 2014-12 allows prospective or retrospective adoption based on the election of the reporting entity. This election is adopted for statutory financial statements; however, reporting entities shall follow the approach used when completing their GAAP financials (if applicable). The disclosures in SSAP No. 3—Accounting Changes and Corrections of Errors shall be completed in the first interim and annual reporting period of adoption.
145. This statement adopts with modification GAAP guidance regarding stock options and stock purchase plans reflected in Topic 718: Compensation – Stock Compensation, as amended by ASU 2010-13, Compensation – Stock Compensation (Topic 18): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Current of the Market in Which the Underlying Equity Security Trades, with the exception of FASB Codification Subtopic 718-40: Employee Stock Ownership Plans. Statutory guidance on employee stock ownership plans is provided in SSAP No. 12—Employee Stock Ownership Plans. This adoption with modification includes the related implementation guidance reflected within the FASB Codification Topic 718, not reflected within this standard. Modifications to the adopted GAAP guidance are as follows:
a. GAAP references are revised to reference applicable statutory accounting guidance.
b. GAAP reporting line items (either explicitly provided in the statement or adopted by reference – such as the GAAP implementation guidance) shall be replaced to reference applicable statutory annual statement line items. (For example, GAAP references to “other comprehensive income” shall be reflected within “Surplus - Unassigned Funds”).
c. GAAP guidance to calculate earnings per share is not applicable to statutory accounting and has not been included within the statement.
d. GAAP effective date and transition, and transition disclosures have not been incorporated. Reporting entities shall follow the effective date and transition elements provided within this statement.
e. Inclusion of guidance specific to statutory for consolidated/holding company plans.
146. This statement adopts with modification GAAP guidance regarding the exchange of equity instruments for goods or services with non-employees as reflected in Subtopic 505-50 – Equity, Equity-Payments to Non-Employees. Modifications to this adopted GAAP guidance are as follows:
a. Prepaid assets are nonadmitted.
b. Costs for goods and services shall be recognized when the goods or services are received consistent with other statutory accounting principles.
c. Minimum value method for determining fair value is rejected for all entities.
d. Estimates of expected costs for the exchange of equity instruments dependent on market conditions or performance obligations shall be determined based on the best estimate of fair values. If a better estimate cannot be determined, then the midpoint (rather than the lowest amount) of aggregate fair values within the range shall be used.
e. GAAP references are revised to reference applicable statutory accounting guidance.
147. The adoption with modification of FASB Codification Topic 718 and Subtopic 505-50 detailed in paragraphs 145-146 also reflects adoption with modification of the following pre-codification GAAP standards:
a. FAS 123R, Share-Based Payment (FAS 123R);
b. FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (FAS 150) – (Adopted only to the extent referenced in FAS 123R for classifying instruments as equity or liability for application in this statement. Adopted guidance is reflected in Exhibit A);
c. FASB Staff Position FAS 123(R)-1: Classification and Measurement of Freestanding Financial Instruments Originally issued in Exchange for Employee Services under FASB Statement No. 123(R) (FAS 123R-1);
d. FASB Staff Position (FSP) FAS 123(R)-2: Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R) (FSP FAS 123R-2);
e. FASB Staff Position (FSP) FAS123(R)-4: Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event (FSP FAS 123R-4);
f. FASB Staff Position (FSP) FAS 123(R)-5: Amendment of FASB Staff Position FAS 123R-1 (FSP FAS 123R-5);
g. FASB Staff Position (FSP) FAS 123(R)-6: Technical Corrections of FASB Statement No. 123(R) (FSP FAS 123R-6);
h. FASB Emerging Issues Task Force 96-18: Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services;
i. FASB Emerging Issues Task Force 97-14: Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested (EITF 97-14);
j. FASB Emerging Issues Task Force 00-08: Accounting by a Grantee for an Equity Instrument to Be Received in Conjunction with Providing Goods or Services;
k. FASB Emerging Issues Task Force 00-16: Recognition and Measurement of Employer Payroll Taxes on Employee Stock-Based Compensation (EITF 00-16);
l. FASB Emerging Issues Task Force 00-18: Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees; and
m. FASB Technical Bulletin 97-01, Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option (TB 97-01)
148. The adoption with modification of FASB Codification Topic 718 in this statement reflects rejection of the following pre-codification GAAP standards:
n. FASB Staff Position (FSP) FAS 123(R)-3: Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (FSP FAS 123R-3); and
o. FASB Staff Position (FSP) EITF 03-6-1; Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1).
Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): None
Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None.
Staff Recommendation:
It is recommended that the Working Group move this item to the nonsubstantive active listing and expose proposed revisions to SSAP No. 104R as detailed within this agenda item. These revisions propose adoption with modification of the ASU 2016-09 guidance for share-based payments, with revisions to reflect changes in SSAP No. 104R. Staff has proposed similar transition guidance that what was captured previously in SSAP No. 104R, noting that the company should follow the transition method that is consistent with how they adopted the U.S. GAAP revisions. Staff asks for comment on this transition guidance as it will result with different transition for the different amendments, and possibly different transition based on a company’s elections under U.S. GAAP. Staff inquires whether there are non-GAAP companies that would be captured in this guidance and specifically requests comments on the proposed transition for these companies.
The proposed revisions to SSAP No. 104R are presented in numerical order below.
Please see Appendix A for detail of the changes that correspond to the U.S. GAAP simplification revisions and related transition guidance.
Staff Note – In response to the original exposure in April 2017, it was identified that paragraphs 91-100 in SSAP No. 104R should also be reviewed with revisions reflected in the ASU, and that limited revisions may also be required to SSAP No. 12—Employee Stock Ownership Plans. These updated revisions, along with the original proposed revisions are shown below:
July 2017 – Updated Proposed Revisions to SSAP No. 104R and SSAP No. 12:
26. Similarly, a provision for either direct or indirect (through a net-settlement feature) repurchase of shares issued upon exercise of options (or the vesting of nonvested shares), with any payment due employees withheld to meet the employer’s minimum statutory withholding requirements resulting from the exercise, does not, by itself, result in liability classification of instruments that otherwise would be classified as equity. However, if an the amount that is withheld, or may be withheld at the employer’s discretion, in excess of the maximum statutory tax rates in the employee’s applicable jurisdictions, minimum statutory requirement is withheld, or may be withheld at the employee’s discretion, the entire award shall be classified and accounted for as a liability. That is, to qualify for equity classification, the employer must have a statutory obligation to withhold taxes on the employee’s behalf, and the amount withheld cannot exceed the maximum statutory tax rates in the employees’ applicable jurisdictions. The maximum statutory tax rates are based on the applicable rates of the relevant tax authorities (for example, federal, state, and local), including the employee’s share of payroll or similar taxes, as provided in tax law, regulations, or the authority’s administrative practices, not to exceed the highest statutory rate in that jurisdiction, even if that rate exceeds the highest rate that may be applicable to the specific award grantee.
27. Minimum statutory withholding requirements are to be based on the applicable minimum statutory withholding rates required by the relevant tax authority (or authorities, for example, federal, state, and local), including the employee’s share of payroll taxes that are applicable to such supplemental taxable income.
27. Cash paid to a tax authority by an employer when withholding shares from an employee’s award for tax-withholding purposes shall be considered cash flows from financing activities in the Statement of Cash Flows as it represents an outlay to reacquire the entity’s equity instruments.
36. The measurement objective for equity instruments awarded to employees is to estimate the fair value at the grant date of the equity instruments that the entity is obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments (for example, to exercise share options). That estimate is based on the share price and other pertinent factors, such as expected volatility, at the grant date. The following subparagraphs provide guidance regarding the measurement objective and measurement date for liability instruments: