Volume 25, No. 11

Early Birds: Why Firms Are Changing Accounting For Stock Compensation: Last March, the FASB released Accounting Standards Update No. 2016-09, blandly entitled “Improvements to Employee Share-Based Payment Accounting.” The FASB’s simplification binge of the last few years reached stock compensation accounting, much to the delight of financial statement preparers. Stock comp accounting is full of cumbersome twists; how can you oppose simplifying it?

The standard made eight modifications to existing standards. Some aspects of them applied to only non-public companies, and most of them were truly of an “inside baseball” nature: they affected the underlying accounting duties related to stock comp without resulting in a noticeable effect on the financial statements. Two of the amendments, however, have had a visible effect on some companies’ financial statements, and on items of great interest to investors: income taxes and cash flows. A third amendment dealing with forfeitures of equity-based awards may make for visible differences in income statement reporting, with uncertain effects on profitability.

The standard has been quickly adopted, even though it isn’t required for public companies until next year. Through October 10, we’ve logged 343 early adopters. There are choices firms can make with the implementation of the standards, and naturally, not every firm is going to make the same ones. And in this case, the early birds deliver the worm. In this report, we look at how adoption choices made so far by firms may trip up investors - and look ahead to next year when all companies implement the new standard.

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