FASB proposes to add guidance on accounting for profits interest awards

The Financial Accounting Standards Board proposed an accounting standards update Thursday that would add illustrative guidance to help companies determine whether the profits interest and similar awards they hand out to executives should be accounted for as share-based payment arrangements.

The changes would be made within the scope of Topic 718, Compensation—Stock Compensation in FASB’s accounting standards codification. 

The term “profits interest” isn’t defined in U.S. GAAP, FASB noted, but differentiates those interests from capital interests held by investors that provide those holders with rights to the existing net assets in a partnership. Some entities, usually private companies, provide employees and other service providers 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.

FASB’s Private Company Council and other stakeholders have pointed to differences in practice among businesses in how they account for these awards, whether as a share-based payment arrangement under Topic 718 or similar to a cash bonus or profit-sharing arrangement under Topic 710, Compensation—General, or other Topics.  

As certain public business entities also may be required to account for profits interest awards, the PCC recommended that FASB add a project that would provide illustrative guidance for all reporting entities that account for profits interest and similar awards.

FASB is asking for comments on the proposal by July 10, 2023.

The proposed ASU, including information on how to submit comments, is available at www.fasb.org.