ASC 718-740
Income Taxes
718 Compensation—Stock Compensation
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ASC 718-740 governs the income tax accounting consequences of share-based payment arrangements, including employee stock ownership plans. Cumulative compensation cost recognized for awards that ordinarily generate a future tax deduction creates a deductible temporary difference and a deferred tax asset (718-740-25-2, 25-4), measured on book compensation cost rather than the shares' current fair value. When the actual tax deduction is finally determined (typically at exercise, expiration, or vesting), any difference between it and cumulative book compensation cost is recognized as income tax expense or benefit in the income statement (718-740-35-2).
Key points (7)
- Cumulative compensation cost recognized for equity-classified (718-740-25-2) and liability-classified (718-740-25-4) awards that ordinarily result in a future tax deduction is a deductible temporary difference under Subtopic 740-10, based on book compensation cost; capitalized compensation cost becomes part of the asset's tax basis for financial reporting.
- Awards that ordinarily do not produce tax deductions (e.g., incentive stock options) create no deductible temporary difference; tax effects of a future event such as a disqualifying disposition are recognized only when that event occurs (718-740-25-3).
- Deferred tax benefit or expense from increases or decreases in the share-based payment temporary difference (additional service rendered, forfeiture) is recognized in the income statement (718-740-30-1).
- In measuring the gross deferred tax asset and any valuation allowance, differences between the book-based deductible temporary difference and the deduction implied by current share fair value are ignored (718-740-30-2).
- The tax effect of any difference between cumulative book compensation cost and the actual tax deduction is recognized as income tax expense or benefit in the income statement in the period the deduction amount is determined—generally exercise or expiration of options or vesting of nonvested stock (718-740-35-2).
- For leveraged ESOPs, differences between fair value of shares committed to be released and their cost to the plan, or timing differences, are accounted for under Subtopic 740-10 (718-740-25-6), with the tax effect of the cost/fair value difference recognized in the income statement (718-740-45-5).
- Tax benefits of tax-deductible dividends on allocated and unallocated ESOP shares go to income taxes allocated to continuing operations (718-740-45-7), and income tax benefits from dividends charged to retained earnings on nonvested equity shares/units and outstanding share options are recognized in the income statement (718-740-45-8).
For students. Exam favorite: the DTA is built on book compensation cost, not the stock's current price, and after ASU 2016-09 all excess tax benefits and deficiencies run through income tax expense in the income statement—no more APIC pool. A common mistake is recording a DTA for incentive stock options; those get no temporary difference unless and until a disqualifying disposition occurs.
deductible temporary differencedeferred tax assetexcess tax benefitvaluation allowancedisqualifying dispositionemployee stock ownership plandividends on share-based payment awardsshare-based payment arrangement
Machine-generated study aid for ASC 718-740. Check the source paragraphs below.
718-740-00Status
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718-740-00-1
The following table identifies the changes made to this Subtopic.
718-740-05Overview and Background
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718-740-05-1
Topic 740 addresses the majority of tax accounting issues and differences between the financial reporting (or book) basis and tax basis of assets and liabilities (basis differences).
718-740-05-2
This Subtopic addresses the accounting for current and deferred income taxes that results from share-based payment arrangements, including employee stock ownership plans.
718-740-05-3
This Subtopic specifically addresses the accounting requirements that apply to the following:
- aThe determination of the basis differences which result from tax deductions arising in different amounts and in different periods from compensation cost recognized in financial statements
- bThe recognition of tax benefits when tax deductions differ from recognized compensation cost
- cThe presentation required for income tax benefits from share-based payment arrangements.
718-740-05-4
Income tax regulations specify allowable tax deductions for instruments issued under share-based payment arrangements in determining an entity's income tax liability. For example, under tax law, allowable tax deductions may be measured as the intrinsic value of an instrument on a specified date. The time value component, if any, of the fair value of an instrument generally may not be tax deductible. Therefore, tax deductions may arise in different amounts and in different periods from compensation cost recognized in financial statements. Similarly, the amount of expense reported for an employee stock ownership plan during a period may differ from the amount of the related income tax deduction prescribed by income tax rules and regulations.
718-740-15Scope and Scope Exceptions
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Overall Guidance
718-740-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 718-10-15, with specific transaction qualifications noted below.
Transactions
718-740-15-2
The guidance in this Subtopic applies to share-based payment transactions.
718-740-25Recognition
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Determination of Temporary Differences
718-740-25-1
This guidance addresses how temporary differences are recognized for share-based payment arrangement awards that are classified either as equity or as liabilities under the requirements of paragraphs 718-10-25-7 through 25-19A. Incremental guidance is also provided for issues related to employee stock ownership plans.
718-740-25-2
The cumulative amount of compensation cost recognized for instruments classified as equity that ordinarily would result in a future tax deduction under existing tax law shall be considered to be a deductible temporary difference in applying the requirements of Subtopic 740-10. The deductible temporary difference shall be based on the compensation cost recognized for financial reporting purposes. Compensation cost that is capitalized as part of the cost of an asset, such as inventory, shall be considered to be part of the tax basis of that asset for financial reporting purposes.
718-740-25-3
Recognition of compensation cost for instruments that ordinarily do not result in tax deductions under existing tax law shall not be considered to result in a deductible temporary difference. A future event can give rise to a tax deduction for instruments that ordinarily do not result in a tax deduction. The tax effects of such an event shall be recognized only when it occurs. An example of a future event that would be recognized only when it occurs is an employee's sale of shares obtained from an award before meeting a tax law's holding period requirement, sometimes referred to as a disqualifying disposition, which results in a tax deduction not ordinarily available for such an award.
718-740-25-4
The cumulative amount of compensation cost recognized for instruments classified as liabilities that ordinarily would result in a future tax deduction under existing tax law also shall be considered to be a deductible temporary difference. The deductible temporary difference shall be based on the compensation cost recognized for financial reporting purposes.
718-740-25-5
The following guidance addresses elements unique to an employee stock ownership plan. See Subtopic 718-40 for the non-income-tax accounting requirements and terminology applicable to employee stock ownership plans.
718-740-25-6
For employers with leveraged employee stock ownership plans, the amount of employee stock ownership plan-related expense reported under the requirements of Subtopic 718-40 for a period may differ from the amount of the employee stock ownership plan-related income tax deduction (prescribed by income tax rules and regulations) for that period. Differences result in either of the following situations:
- aThe fair value of shares committed to be released differs from the cost of those shares to the employee stock ownership plan.
- bThe timing of expense recognition is different for income tax and financial reporting purposes.
718-740-25-7
Employers with nonleveraged employee stock ownership plans may accrue compensation cost for financial reporting purposes earlier than the cost is deductible for income tax purposes. Accruing the compensation cost earlier for financial reporting purposes creates a temporary difference under the requirements of Subtopic 740-10.
718-740-25-8
See Section 718-40-55 for several illustrations of the accounting for employee stock ownership plans, including the related income tax accounting.
718-740-30Initial Measurement
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718-740-30-1
The deferred tax benefit (or expense) that results from increases (or decreases) in the recognized share-based payment temporary difference, for example, an increase that results as additional service is rendered and the related cost is recognized or a decrease that results from forfeiture of an award, shall be recognized in the income statement.
718-740-30-2
Subtopic 740-10 requires a deferred tax asset to be evaluated for future realization and to be reduced by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Differences between the deductible temporary difference computed pursuant to paragraphs and the tax deduction that would result based on the current fair value of the entity's shares shall not be considered in measuring the gross deferred tax asset or determining the need for a valuation allowance for a deferred tax asset recognized under these requirements.
718-740-35Subsequent Measurement
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718-740-35-1
Section 718-740-30 addresses initial measurement issues related to share-based payment temporary differences. The requirements of that Section also apply to subsequent measurements of share-based payment temporary differences. The guidance in this Section is incremental to the guidance for initial measurement.
Treatment of Tax Consequences When Actual Deductions Differ from Recognized Compensation Cost
718-740-35-2
This Section addresses the accounting required in a period when the deduction for compensation expense to be recognized in a tax return for share-based payment arrangements differs in amounts and timing from the compensation cost recorded in the financial statements. The tax effect of the difference, if any, between the cumulative compensation cost of an award recognized for financial reporting purposes and the deduction for an award for tax purposes shall be recognized as income tax expense or benefit in the income statement. The tax effect shall be recognized in the income statement in the period in which the amount of the deduction is determined, which typically is when an award is exercised or expires, in the case of share options, or vests, in the case of nonvested stock awards. The appropriate period depends on the type of award and the incremental guidance under the requirements of Subtopic 740-270 on income taxes—interim reporting.
718-740-35-4
See Examples 1, Case A (paragraph 718-20-55-10); 8 (paragraph 718-20-55-71); 15, Case A (paragraph 718-20-55-123); and Example 1 (paragraph 718-30-55-1), which provide illustrations of accounting for the income tax effects of various awards.
718-740-45Other Presentation Matters
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Employee Stock Ownership Plans
718-740-45-5
The tax effect of the difference, if any, between the cost of shares committed to be released and the fair value of the shares shall be recognized as income tax expense or benefit in the income statement.
718-740-45-7
The tax benefit of tax-deductible dividends on allocated and unallocated employee stock ownership plan shares shall be recognized in income taxes allocated to continuing operations.
Tax Benefits of Dividends on Share-Based Payment Awards to Employees
718-740-45-8
An income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to grantees for any of the following equity classified awards shall be recognized as income tax expense or benefit in the income statement:
- a Nonvested equity shares
- b Nonvested equity share units
- c Outstanding equity share options.
718-740-50Disclosure
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718-740-65Transition and Open Effective Date Information
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718-740-65-1
Paragraph superseded on 03/23/2010 after the end of the transition period stated in EITF Issue No. 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards."
718-740-S55Implementation Guidance and IllustrationsSEC
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Accounting for Income Tax Effects of Share-Based Payment Arrangements Upon Adoption of Topic 718
718-740-S55-1
See paragraph 718-10-S99-1, SAB Topic 14.J, for SEC Staff views on accounting for the income tax effects of share-based payment arrangements upon adoption of Topic 718.
Related subtopics
- 718-20 Awards Classified as EquityCompensation—Stock Compensation
- 718-30 Awards Classified as LiabilitiesCompensation—Stock Compensation
- 740-10 OverallIncome Taxes
- 740-30 Other Considerations or Special AreasIncome Taxes
- 740-830 Foreign Currency MattersIncome Taxes
- 718-10 OverallCompensation—Stock Compensation