The Financial Accounting Standards Board has issued an accounting standards update to improve the accounting for employee share-based payments.

The update affects all organizations that issue share-based payment awards to their employees.

The ASU, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.

The ASU also simplifies two areas specific to private companies:

Practical Expedient for Expected Term: In lieu of estimating the period of time that a share-based award will be outstanding, private companies can now apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics.

Intrinsic Value: Private companies can now make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. Previously, private companies were provided an option to measure all liability-classified awards at intrinsic value, but some private companies were unaware of that option.

“Both public and private company stakeholders identified a few aspects of accounting for employee share-based awards that are unnecessarily complex,” said FASB Chair Russell G. Golden in a statement. “Based on input from those stakeholders—including the Private Company Council—the FASB has issued a standard that we believe will simplify the accounting while maintaining the usefulness of information provided to investors.”

Accounting for employee share-based awards was identified by the Private Company Council as an area of concern among private company stakeholders. The PCC worked with FASB to discuss and analyze the issues that private companies have encountered in this area when applying the standard. The PCC also asked the FASB staff to conduct outreach with users as a part of the FASB’s pre-agenda research on the topic.

Concurrently, the FASB received feedback from stakeholders through its Simplification Initiative suggesting that the accounting for employee share-based awards could be simplified.

FASB said it also considered the conclusions in the Financial Accounting Foundation’s Post-Implementation Review Report on Statement 123(R), Share-Based Payment. While the report concluded that the prior standard achieved its purpose, it noted that certain areas within Statement 123(R) could be costly and difficult to apply.

Based on this collective input, FASB subsequently added the project to its agenda.

For public companies, the amendments in this ASU are effective for annual periods beginning after Dec. 15, 2016, and interim periods within those annual periods. For private companies, the amendments are effective for annual periods beginning after Dec. 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any organization in any interim or annual period.

The accounting standards update is available at www.fasb.org.

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