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The new guidance is intended to simplify the difference between the compensation expense recognized for book purposes and the deduction taken for tax purposes.

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New Stock-Based Compensation Standard Makes Accounting Easier for Banks

  • David Heneke
  • 1/8/2018

Many banks are looking for ways to retain, encourage, and reward their personnel. As a result, you may have considered, or have already begun, offering various stock compensation plans to your employees.

While stock-based plans are popular in C-corporations, offering them as part of your benefit plan creates complex accounting challenges, as the amount of the tax deduction taken on a bank’s tax return may be different from the amount of expense recorded for book purposes.

The new Accounting Standard Update (ASU) 2016-09, Compensation–Stock Compensation (Topic 718), simplifies the accounting for the taxation of stock-based plans. Under this new guidance, the difference between the tax deduction and book expense will now flow through the disclosures in the financial statement as a permanent difference, meaning banks will no longer need to record an entry through additional paid in capital. The Financial Accounting Standards Board’s (FASB) objective with this new guidance is to reduce cost and complexity and improve the accounting for share based payment awards issued to employees.

Existing standard shows difference between deduction and expense

Typically, the expense for stock compensation plans is based on the computed fair value of the stock awards at the date of grant and is recorded over a vesting period or lapse of a contractual restriction. For tax purposes, a deduction is sometimes allowed when the amount the employee is due (i.e., the stock price at which the stock compensation plan will be paid out) is known. Because the fair value of each unit granted in the stock plan is rarely the same as the ultimate ending share price, this can lead to a difference in the amount of the tax deduction and the book expense.

The information below starts with the following assumptions:

Stock Comp Table 1 sm

The following example shows the current journal entries and balances of each account based on the inputs above:

Stock Comp Table 2 sm 

Under the prior accounting standard, the difference between the deduction amount and the book expense is recorded as additional paid in capital. In the example above, the difference between the fair value of the grant and the deduction ($3,500,000 tax deduction vs. $2,500,000 book expense) multiplied by the tax rate ($1,000,000 * 38% = $380,000) arrives at the adjustment through additional paid in capital. Without this entry, a permanent difference would be recorded in the reconciliation of tax expense on the statutory rate reconciliation.

Below is an example calculation and disclosure information based on the prior accounting standard:

Stock Comp Table 3 sm 

New standard uses income tax expense to net difference

Under the new accounting standard, the difference between the deduction amount and book expense will be recorded through income tax expense, and a permanent difference will be shown on the statutory rate reconciliation.

The following example outlines the new treatment for a typical stock plan:

Stock Comp Table 4 

In the example above, the difference between the fair value of the grant and the deduction ($3,500,000 tax deduction vs. $2,500,000 book expense) multiplied by the tax rate ($1,000,000 * 38% = $380,000) is included in the overall income tax expense entry. This creates a permanent difference on the statutory rate reconciliation.

Below is an example calculation and disclosure information based on the new accounting standard:

Stock Comp Table 5 sm 

How we can help

An increasing number of banks are beginning to offer stock-based plans to their employees. Whether you already offer one or are considering adding a stock compensation plan to your benefit offerings, we can help your bank keep the proper accounting protocols in place on an ongoing basis.