Restricted Stock or Options? Accounting Change Raises Questions

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By Allyson Versprille

Companies may want to factor in a recent accounting change when considering the types of stock compensation awards they offer to employees.

In March 2016, the Financial Accounting Standards Board (FASB) issued a standard that requires companies to record the tax effects related to share-based employee compensation payments on their income tax statements when the stock awards vest or are exercised.

It would make sense for companies to consider the accounting standard ( ASU 2016-09) when thinking about the types of stock compensation awards they issue in the future because it’s easier to predict when certain types of awards will create changes to a company’s financial statements, said Jay Seliber, a partner in the National Professional Services Group at PricewaterhouseCoopers LLP.

Before the issuance of ASU 2016-09, companies recorded tax benefits in excess of compensation cost—sometimes called windfalls—in equity. They recorded tax deficiencies—shortfalls—in equity to the extent of previous windfalls, and then to the income statement. Under ASU 2016-09, windfalls and shortfalls fluctuate based on whether a company’s stock price is rising or falling.

“In the U.S., for the most part, a company gets a tax deduction if a restricted share or a restricted share unit vests,” and restricted stock vests or settles on a fixed date, said Seliber, who has written PwC briefs on the new accounting standard. So if a company uses restricted stock, it can model out when the deduction will occur because it knows when the vesting date is, he said. It won’t know if it will have windfalls or shortfalls—or how large or small those numbers will be—but at least it will be able to anticipate when those will occur, he said.

Conversely, with stock options the windfalls and shortfalls reported in any given quarter will be “dependent upon when an employee chooses to exercise or in some cases sell the underlying shares, so it’s harder” to predict, Seliber said.

Takis Makridis, president and CEO of Equity Methods LLC, predicted that most companies using restricted stock would see windfalls and shortfalls in their first quarters because that is typically when they issue a large annual grant. And because restricted stock vests on a fixed date, “the three-year anniversary—assuming a three-year vesting schedule of the annual grant—is when a tsunami of excess tax benefits or shortfalls all hit,” he said.

Companies that issue stock options will likely see excess windfalls and shortfalls clustered around stock price runoffs, Makridis said. “Because we know when the stock price runs up, it causes option holders to lock in their gains and pull the trigger.”

Under either choice, companies will still see more volatility in their financial statements overall, because reported windfalls and shortfalls will vary depending on how well the stock market is doing, Seliber said.

“At the end of the day, you’re going to have more volatility,” he said.

To contact the reporter on this story: Allyson Versprille in Washington at

To contact the editor responsible for this story: Meg Shreve at

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