Previously, we blogged about the pending changes to the accounting rules for stock-based compensation (see, for example, “Another Suggested Stock Incentive Plan Revision for 2016 – Part 3”). Last week, FASB adopted the changes to ASC 718 in ASU 2016-09, effective for public companies’ fiscal years beginning after December 15, 2016. The general principles and most of the technical rules for stock-based compensation remain the same. However, the new rules make a few key changes that should prove useful to public companies.
Generally, there are two changes that will have an effect beyond the serious accounting folks: (1) a favorable change to the limitations on companies’ ability to withhold income taxes from equity awards and (2) a change to accounting for future tax deductions attributable to current equity awards (the so-called APIC windfall pool), which could wreak some havoc on companies’ performance-based awards, even though the overall result is generally favorable. Today, we will only talk about the change to withholding (because the other one is a bit mind-bending, and my friend and associate Tom Moore is still trying to explain it to me).
ASC 718 will now allow companies to withhold shares for taxes up to the maximum individual tax rate in the applicable jurisdiction rather than the minimum statutory withholding amount. As most readers know, currently, to avoid triggering liability accounting treatment, any shares withheld to cover the taxes due at settlement of an option or award must be limited to the minimum required statutory withholding of the award holder. Most companies and their counsel have hardwired the minimum required statutory tax-withholding requirement into their stock plan documents.
Withholding taxes at a rate higher than the minimum may not appeal to many companies, which then would have to come up with cash to pay the tax. However, most companies (and many executives) will want to preserve the flexibility to withhold taxes at a higher rate in some circumstances. Therefore, we are suggesting plan amendments that make a simple language change that gives the company flexibility in tax withholding within the confines of ASC 718’s liability accounting provision.