DCAA and DCMA Issue Implementation Guidance on Blended Rates

The FASB’s main private company advisors recently threw their support behind the board’s decision to propose four illustrative examples to clarify the reporting of profits interest awards.

Profits interests are compensation awards that provide an interest in a partnership’s future profits but confusion has bubbled up about which accounting rule related to compensation in U.S. GAAP to apply.

The proposal will be issued during next year’s first quarter. Companies will get 60 days to weigh in.

“I think this is going to be very helpful especially for the preparers and the practitioners that don’t have access to a national office,” Private Company Council (PCC) Chair Candace Wright said during Dec. 16, 2022, discussions with the FASB. “We have access to national office materials a lot but we don’t have access to interpretation of those materials from a national office,” she said.

Wright, who is also a director with Postlethwaite & Netterville in Louisiana, said the guidance would facilitate clarity and consistency in financial reporting. “I think it’s going to help,” she said.

The PCC comprises 11 members who work with the FASB to develop or amend U.S. GAAP so that they better meet the needs of private companies, many of which have limited resources. One PCC suggestion was that the board increase communication about the coming profits interest proposal as many smaller companies might not be aware that the guidance is being developed.

“We all collectively said there’s really not a problem in GAAP, it’s just really a lack of understanding how it should be applied and that’s where these illustrations come in,” Jeremy Dillard, partner with SingerLewak LLP, said. “What are the planned efforts to make smaller companies aware of this?” he asked.

Practitioners generally would play a key role in getting the news out to that business demographic, according to the discussions. “Oftentimes the smaller preparers don’t read our materials, they don’t come to our website,” FASB member Susan Cosper said. “So the key to me is the practitioner base.”

Guide to demonstrate rules

At its core, the proposal would demonstrate how an entity would apply the scope guidance in Subtopic 718-10, Compensation-Stock Compensation-Overall, to determine whether a profits interest or similar award should be accounted for in accordance with Topic 718.

In general, the examples would focus on the scope criteria in paragraph 718-10-15 on determining whether proceeds the grantee would receive from an award are based at least in part on the price of the entity’s equity, a staff member said during the meeting. The examples also incorporate other factors such as whether the grantee would forfeit ownership of a nominee-vested award upon termination of employment.

Further, an entity would have the option to apply the guidance either retrospectively to all prior periods presented in the financial statements, or prospectively to awards granted or modified on or after the effective date “with qualitative disclosures about the nature of and reason for the change in accounting principle.”

Optional retrospective transition okay?

Asked by FASB Vice Chair James Kroeker whether PCC members thought the provision for optional retrospective transition would be useful, the group did not signal concerns.

“I don’t have any concerns with optional retrospective - this might be an area where people might want the optionality,” Adam Roark, managing director, FORVIS, said. “I’ve had conversations recently with practitioners and entities in thinking about how because practice was guiding a lot of the guidance here and how that evolved over the past 5 to 10 years and conclusions that were made 5 years ago are not exactly the way firms are making conclusions today,” he said. ” And I’ve had instances with portfolio companies with private equity - to the extent that there is diversity within a collection of organizations, having the opportunity to make it consistent might be something that’s appreciated.”

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