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FASB clarifies guidance on profits interest awards

March 21, 2024

The Financial Accounting Standards Board released an accounting standards update Thursday that provides illustrative guidance to help entities determine whether profits interest and similar awards should be accounted for as share-based payment arrangements within the scope of FASB's stock compensation rules.

With the new guidance on profits interest awards, FASB noted that some entities, usually private companies, provide employees and other nonemployees with profits interest and similar awards to align compensation with the company's operating performance and provide those holders with the opportunity to participate in future profits and/or equity appreciation of the company. The board's advisory group, the Private Company Council, and other stakeholders pointed to differences in practice in accounting for these awards as share-based payment arrangements under Topic 718 in the FASB Accounting Standards Codification, which covers stock compensation, or similar to cash bonus or profit-sharing arrangements under Topic 710, "Compensation — General," and other topics.

The new accounting standards update addresses this feedback by offering an illustrative example to show how entities that account for profits interest and similar awards would determine whether a profits interest award should be accounted for in accordance with Topic 718.

For public companies, the update takes effect for annual periods beginning after Dec. 15, 2024, and interim periods within those annual periods. For all other entities, the amendments take effect for annual periods starting after Dec. 15, 2025, and interim periods within those annual periods. Early adoption is allowed.

Separately on Wednesday, FASB named Jackson Day to the role of director of technical activities. He will begin his new duties this July. He joins the board from Ernst & Young, where he is a partner working in professional practice. He spent most of his 38-year accounting career at EY, initially joining in 1986 on the audit staff in St. Louis. He later served as EY Global's director of capital markets, as well as EY's U.S. chief accountant. He also worked as the deputy chief accountant and, later, acting chief accountant, in the Office of the Chief Accountant at the Securities and Exchange Commission from 2000-03. He was a FASB practice fellow from 1997-99, and has been a member of FASB's Emerging Issues Task Force.

[Accounting Today]

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