FASB Stock Options Reporting Simplification Update Shifts Deduction to Income Statement
July 29, 2016
In March of 2016, the Financial Accounting Standards Board quietly issued a simplification update to Topic 718, Stock Compensation, which is now getting some media attention and may increase company interest in issues stock options. The accounting change shifted the employer deduction for excess tax benefits stemming from option awards from the balance sheet to the income statement. Companies which award stock options generate a tax benefit which is realized as a deduction when the employees exercise the option. Under current rules, the deduction amount is calculated by comparing the exercise price of option at grant with the stock price at exercise with the excess difference reflecting the tax benefit for the company. Where the changes come in are with regard to where companies get to report the deduction amount. Currently, companies report the tax benefit as a credit on the balance sheet. However, under the simplification update, the deduction now need to be reported on the balance sheet. Gretchen Morgenson of the New York Times described the shift as having the effect of "appearing to juice" corporate earnings, but it will also have the effect of giving investors a better way of examining the effective tax rate paid by the company. The Times cites former Lehman Brothers Managing Director of Equity Research, Robert Willens who claims that investors will see a reduction in the effective tax rate paid by a company from around 40 percent to around 12 or 13 percent as a result of the implementation of the the accounting changes. However, Mr. Williens also tells the paper that the rule change will result in a "truer picture" of a company's financial picture, thus increasing transparency.