The Financial Accounting Standards Board (FASB) has released Accounting Standards Update (ASU) No. 2024-01, Scope Application of Profits Interest and Similar Awards. The update aims to clarify whether a profits interest or similar award is stock compensation, within the scope of Accounting Standards Codification (ASC) Topic 718, Compensation — Stock Compensation, or whether the award is similar to a cash bonus or profit-sharing arrangement, and therefore within the scope of other guidance. Previously, there was diversity in practice in how these awards were treated.

The ASU provides an illustrative example to help companies determine if these types of awards should be accounted for in accordance with ASC 718 and is intended to reduce complexity and ensure consistent application of existing guidance.

The standard’s key provisions include:

  • Illustrative Example: The update provides an illustrative example with four fact patterns to demonstrate how to apply the scoping guidance and which factors to consider in doing so.
  • Focus on Key Conditions: The example focuses on the specific conditions outlined in the scoping guidance in ASC 718 (paragraph 718-10-15-3), making it easier for companies to determine the appropriate accounting treatment.
  • Enhanced Clarity: Minor phrasing changes were made to paragraph 718-10-15-3 to improve overall clarity without altering the guidance. This is meant to foster better understanding and avoid misinterpretations.

The ASU’s amendments are effective for public business entities for annual periods beginning after Dec. 15, 2024, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2025, and interim periods within those annual periods. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. If an entity adopts the amendments in an interim period, it should adopt them as of the beginning of the annual period that includes that interim period.

The amendments in this Update should be applied either (1) retrospectively to all prior periods presented in the financial statements or (2) prospectively to profits interest and similar awards granted or modified on or after the date at which the entity first applies the amendments.

Next Steps

To ensure alignment with the new ASU, we recommend connecting with one of our financial professionals today for guidance and compliance support.

Published on April 01, 2024