On May 11th, the Financial Accounting Standards Board (FASB) released a proposed Accounting Standards Update (ASU) designed to enhance generally accepted accounting principles (GAAP) by including illustrative guidance to help entities determine whether profits interest and similar awards should be considered a share-based payment arrangement within the scope of Topic 718, Compensation—Stock Compensation. The FASB is inviting interested parties to submit feedback on the proposed update.
Private companies customarily provide employees and service providers with profits interest and similar awards to align pay with the company’s operating performance. They also allow those holders to participate in the company’s future profits and/or equity appreciation. The Private Company Council (PCC) and other stakeholders have identified current varying practices in accounting for these awards as a share-based payment arrangement pursuant to Topic 718 or comparable to a cash bonus or a profit-sharing arrangement (Topic 710, Compensation—General, or other Topics). Just as it may also be required of some public business entities to account for profits interest awards, the PCC recommended that the FASB add a project that would provide illustrative guidance for all reporting entities that account for profits interest and similar awards.