FASB Issues Standard That Clarifies Accounting Guidance Related to Profits Interest Awards

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

Certain entities, typically private companies, provide employees and other nonemployees 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 and other stakeholders noted diversity in practice in accounting for these awards as share-based payment arrangements under Topic 718 or similar to cash bonus or profit-sharing arrangements (Topic 710, Compensation—General, or other Topics).

The ASU addresses this input by providing an illustrative example intended to demonstrate how entities that account for profits interest and similar awards would determine whether a profits interest award should be accounted for in accordance with Topic 718.

For public business entities, the ASU is effective 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.

The ASU, including more information about transition and effective dates, is available at www.fasb.org.