FASB Proposes to Simplify Standards for Stock Compensation and Equity Method of Accounting

The Financial Accounting Standards Board has issued two proposed accounting standards updates with the goal of simplifying employee share-based payment accounting and the equity method of accounting for investments.

FASB issued an exposure draft Monday proposing to improve the standards for stock compensation and employee share-based accounting. 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. Some of the areas for simplification apply only to nonpublic entities.

Under one of the proposals, all excess tax benefits and tax deficiencies would be recognized as income tax expense or benefit in the income statement. An entity also would recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Under another proposal, excess tax benefits would not be separated from other income tax cash flows and, thus, would be classified along with other cash flows as an operating activity. FASB is asking for comments on the proposals by August 14.

In the other exposure draft, released last week, on simplifying the equity method of accounting for investments in joint ventures, FASB is proposing to eliminate the requirement for an equity method investor to account for the basis difference, which is the difference between the cost of an investment and the investor’s proportionate share of the net assets of the investee. Under existing equity method guidance, an entity determines the acquisition date fair value of the identifiable assets and liabilities assumed in the same manner as for a business combination. The entity’s proportionate share of the difference between the fair value of the investee’s identifiable assets and liabilities assumed and the book value of recorded assets and liabilities generally must be accounted for in net income in subsequent periods.

Stakeholders have told FASB that accounting for the basis difference of equity method investments adds cost and complexity to financial statement reporting without improving the usefulness of the information provided to investors. Constituents noted that determining the acquisition date fair value of an investee’s identifiable assets and liabilities assumed can be costly and, in some cases, an entity may not have access or may have limited access to the information necessary to perform the assessment because it does not control the investee.

The proposed amendments would eliminate the requirement to separately account for the basis difference of equity method investments. An entity would recognize its equity method investment at its cost and would no longer determine the acquisition date fair value of the investee’s identifiable assets and liabilities assumed. Comments on the proposal are due August 4.