April 5, 2016

FASB Modifies Accounting Rules for Stock-Based Compensation

Here’s a blog by Gibson Dunn’s Ron Mueller, Sean Feller and Krista Hanvey (also see these memos on

On March 30, 2016, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2016-09, which amends ASC Topic 718, Compensation-Stock Compensation, to require changes to several areas of employee share-based payment accounting.

In an effort to simplify share-based reporting, among other things, the update revises requirements in the following areas:

Minimum Statutory Withholding: The new standard permits share-based withholding up to the maximum statutory tax rates, whereas currently an employer may only withhold up to the minimum statutory tax rate without causing the award to be classified as a liability.
Accounting for Income Taxes – The revised standard will require recording the tax effects of share-based payments at settlement or expiration on the income statement, whereas ASC 718 previously provided for tax benefits in excess of compensation cost and tax deficiencies to be reported in equity to the extent of any previous excess benefits, and then to the income statement. Under the new rule excess tax benefits are also to be classified with other operating income tax cash flows as an operating activity.
Forfeitures – Whereas accruals of compensation cost are currently based on the number of awards that are expected to vest, the revised standard allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.
Intrinsic Value Accounting for Private Entities: Under the update, nonpublic entities will be permitted to make a one-time accounting policy election to switch from measuring all liability-classified awards at fair value to intrinsic value.

With respect to share-based withholding on equity awards, ASC Topic 718 currently provides that equity awards cannot provide for share withholding in excess of an employer’s minimum statutory withholding requirements in order to qualify for equity treatment under the rule. As revised, the rule will now permit withholding up to the maximum statutory tax rate without causing the award to be classified as a liability. In addition, cash paid by an employer when directly withholding shares for tax-withholding purposes should now be classified as a financing activity.

For public companies, the new rules will become effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within such annual period. For all other entities, the new rules will take effect for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.

In light of the new accounting rules, companies will want to review their equity compensation plans and award agreements to determine if they will allow for withholding up to the statutory maximum. In connection with this, issuers that are subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, should review their award agreements with any Section 16 officers and, in order to obtain the exemption under Rule 16b-3 for share withholding in excess of amounts that were previously allowed, may need to provide for compensation committee approval of any new terms that allow for share-based withholding above what was previously authorized.

Transcript: “Key Steps to an Effective Compensation Committee”

We’ve posted the transcript for our recent webcast: “Key Steps to an Effective Compensation Committee.”

According to this note, the Senate Banking Committee will vote on the two SEC Commissioner nominees this Thursday…

T+2 Settlement Gathers Momentum

Here’s this blog by Jill Radloff:

FINRA is seeking comment on proposed amendments to FINRA rules shortening the securities settlement cycle to two days. The rulemaking notice cites a September 2015 letter in which SEC Chair White responded to industry groups expressing her strong support for industry efforts to shorten the trade settlement cycle to T+2 and urging the industry to continue to pursue the necessary steps towards achieving T+2 by the third quarter of 2017. SEC Chair White also indicated that she instructed SEC staff to develop a proposal to amend Exchange Act Rule 15c6-1(a) to require settlement no later than T+2.

Exchange Act Rule 15c6-1 currently establishes “regular way” settlement as occurring no later than T+3 for all securities, except for government securities and municipal securities, commercial paper, bankers’ acceptances, or commercial bills. In anticipation of the SEC’s changes to Rule 15c6-1 to facilitate settlement no later than T+2 and to ensure that FINRA acts in concert and conformity with the impending rule changes by other self-regulatory organizations, or SROs, FINRA is proposing definitional changes to its rules pertaining to securities settlement by, among other things, amending the definition of “regular way” settlement as occurring on T+2. The proposed technical changes would implement the anticipated rule changes of the SEC and the other SROs.

The Municipal Securities Rulemaking Board, or MSRB, has also filed a rule proposal with the SEC to define regular-way settlement for municipal securities transactions as occurring on a two-day settlement cycle.

Broc Romanek