Summer vacation is over and it is back to school. To begin with, we will discuss four recent changes in the accounting rules that may have an impact on equity and other incentive compensation in the upcoming award and proxy season. The first two are well-known to executive compensation professionals. The second two do not directly relate to equity compensation, but could affect the financial performance metrics for outstanding grants and future grants, especially those with performance periods that include the 2017 fiscal year (and subsequent fiscal years). Companies that utilize financial statement items (net income, EBITDA, EPS, etc.) or derivative calculations (ROIC, etc.) in their performance awards should make sure they understand how these changes affect the relevant performance metrics. Your reading of the following should be tempered by the fact that I am not an accountant.

ASU 2016-09 revised ASC 718 effective for public companies’ fiscal years beginning after December 15, 2016, by providing the following two significant updates: (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 equity awards (the so-called APIC windfall pool) as they become vested, which introduces larger earnings and effective tax rate volatility, for which it is difficult to forecast and plan.

In May 2017, Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2017-09, effective for entities’ fiscal years beginning after December 15, 2017, which revised ASC 718 to provide clarity and reduce the “diversity in practice” among companies and accountants in applying ASC 718 to changes to the terms or conditions of share-based payment awards. When a company makes a substantive change to a share-based payment award, it must apply modification accounting (which is usually undesirable). ASU 2017-09 provided some guidance as to what changes are “substantive.”

Way back in May 2014, the FASB issued ASC 606, Revenue from Contracts with Customers, and ASC 340-40, Other Assets and Deferred Costs—Contracts with Customers. Since then, FASB has made various amendments to the guidance, with the last of the amendments finalized in December 2016. The effective date of the new revenue standard is 2018 for calendar year-end public companies. This new GAAP change may change how many entities recognize revenue, which impacts companies that use revenue-based metrics—such as net sales; net income; earnings per share (EPS); return on invested capital (ROIC); earnings before interest, taxes depreciation, and amortization (EBITDA); gross margins; and operating profit for their performance awards.

Finally, in January 2016, FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, effective for public companies’ fiscal years beginning after December 15, 2017. ASU has nothing to do with equity plans and awards, but it changes how companies account for investments in other companies. Generally speaking, as explained to me by my colleague Tom Moore, changes in the value of the equity investments will now be reflected in earnings (during each reporting period), so that for companies with earnings and earnings-related targets (e.g., EPS), this could impact their performance awards.

Compensation committees should consult with the company’s finance and accounting functions to evaluate how these GAAP rule changes will affect currently outstanding and future contemplated performance awards and metrics.