FASB Issues Proposal To Clarify Accounting Guidance Related to Profits Interest Awards

May 11, 2023

The Financial Accounting Standards Board (FASB) recently published a proposed Accounting Standards Update (ASU) intended to improve generally accepted accounting principles (GAAP) by adding illustrative guidance to help entities determine whether profits interest and similar awards should be accounted for as a share-based payment arrangement within the scope of Topic 718, Compensation—Stock Compensation.

In a news release, FASB said private companies often 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. The Private Company Council (PCC) and other stakeholders have highlighted existing diversity in practice in accounting for these awards as a share-based payment arrangement under Topic 718 or similar to a cash bonus or profit-sharing arrangement (Topic 710, Compensation—General, or other Topics), according to the release. As certain public business entities also may be required to account for profits interest awards, the PCC recommended FASB add a project that would provide illustrative guidance for all reporting entities that account for profits interest and similar awards.

Stakeholders are encouraged to review and provide comments on the proposed ASU by July 10, 2023. The proposed ASU, including information on how to submit comments, is available on the FASB website.