FASB proposes illustration for profits interest awards

The determination of whether profits interest awards are share-based payment arrangements within the scope of ASC 718 or within the scope of ASC 710 like a cash bonus or profit-sharing arrangement requires judgement, resulting in diversity in practice. The proposed illustrative example would clarify whether the guidance in ASC 718 should be applied to profits interest awards.

Applicability

Proposed ASU

• All entities that account for profits interest awards.

Relevant dates

• Exposure draft issued May 11, 2023
• Comments due July 10, 2023

Key impacts

Determining whether a profits interest award should be accounted for as a share-based payment arrangement or other compensation requires judgement based on the individual facts and circumstances of the specific transaction. 

The Private Company Council (PCC) identified scope application issues related to accounting for profits interest awards and recommended that the FASB add a project to address these issues, which impact both private and public business entities who issue profits interest and other similar awards. In response, the FASB added a project to its agenda in December 2022 and has since developed an illustrative example that is open for comment. 

The illustrative example includes four different fact patterns to demonstrate how an entity would apply the scope guidance in paragraph 718-10-15-3 to determine whether profits interest awards should be accounted for in accordance with ASC 718. The amendment is intended to reduce complexity and diversity in practice.

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