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Example on accounting for profits interest awards still being issued, FASB affirms

The FASB on Feb. 28, 2024, reaffirmed its vote to issue a final standard to provide an illustrative example on profits interest awards. The rule is aimed at stemming confusion in an area where there is no clear guidance in US GAAP.

The full board agreed with a summary of revisions staff outlined for a final version of Proposed Accounting Standards Update (ASU) No. 2023-ED300, Compensation—Stock Compensation (Topic 718) Scope Application of Profits Interest Awards, which was issued last year for public comment.

Although the board in November 2023 already agreed to finalize the proposal with the revisions, a question later arose when staff was writing the final standard, according to the discussions. Staff therefore wanted to ensure that the board was still in agreement with the final draft.

“I think that the revisions that the staff made will make the examples more relevant for practise and useful as they apply the guidance,” FASB member Susan Cosper said.

The guidance comes as profits interest awards have grown in popularity, especially among partnerships and Limited Liability Companies (LLCs) to provide employees or other service providers with the opportunity to participate in future profits and/or equity appreciation of the business.

The coming illustrative example was proposed with four “fact patterns” i.e. Cases A, B, C, and D, to reflect the technicalities of guidance.

In the final standard, Cases A and B will align with Cases A and B in the proposal even with the revisions, because the revisions did not change the assumptions, fact pattern, or overall conclusion that the fact pattern is in the scope of Topic 718Compensation—Stock Compensation, a staff accountant explained to the board. Rather, the revisions to these cases changed which condition in paragraph 718-10-15-3 causes the fact pattern to be in the scope of Topic 718. “This change responds to comment letter and external review feedback that the assumptions in Cases A and B support a conclusion that the condition in paragraph 15-3(a) is met,” she said.

The standard also includes Case C — a new fact pattern that reflects a scenario in which the condition in paragraph 15-3-B(1) is met, said staff. This case responds to external review feedback that the most common example of an award that meets that condition is a phantom share unit that is settled in cash based on share price in an exit event.

Lastly, Case D in the final standard is based on the same fact pattern as Case C in the proposal, staff said. “While the name of this case changed, the fact pattern was not significantly revised and the conclusion and reasons for the conclusion have not changed,” she said. “Comment letter and external review feedback indicated agreement with the conclusion that Topic 718 does not apply.”

The changes will result “in examples that are going to be even more useful in practice,” FASB member Christine Botosan also agreed. ”And I also think that the revisions that we’re going to make to 718-10-15-3 that doesn’t change the wording but changes the order of the bullet points, is going to make that paragraph more operable,” she said.

Last year, the board said the provisions will be issued during this year’s first quarter.

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