Agenda Introduction 5 min Current and New Guidance 20 min FAQs 25 min

TA: Equity Compensation - Dissecting ASU 2016-09
Paul Rasmussen Sandy Shurin Deloitte Tax LLP

Agenda Introduction 5 min Current and New Guidance 20 min FAQs 25 min
Share-Based Payments – Sample Disclosure Course Conclusion

Introduction

Learning Objectives Upon completion the learner will be able to:
Explain the changes in accounting for income taxes in ASU Discuss the potential impact of ASU with your clients

Old and New Guidance

Tax Accounting for SBC Prior to ASU 2016-09
Excess Deductions ASC (aka FN 82 of FAS 123(R)) requires the tax benefit of the excess tax deduction to be realized by reducing taxes payable prior to being credited to paid-in-capital. The implementation Resource Group concluded that two methods were acceptable: With and without ordering Tax law ordering Tax attributes (tax loss and tax credit carryforwards) attributed to excess tax deductions had to be tracked “off balance sheet”

Excess Deductions (cont.) Once an excess tax deduction is realized (based on the ordering method adopted by the company) the tax benefit of the excess deduction has to be measured. Again, the Resource Group concluded that more than one method would be acceptable: Direct tax effect of the excess tax deduction (at the marginal tax rate) Determine taxes payable with and without the excess tax deduction Total tax effect of the total deduction (FV and excess) determined on a with and without basis less the DTA recognized on the FV amount Once the benefit is considered realized and has been measured, current tax expense is increased by that amount and paid-in-capital is increased by the same amount. The cash flows statement is required to be prepared in a consistent manner (as if a greater amount of tax was paid and then contributed back to equity).

Shortfall DTAs not realized (when the tax deduction is less than the book expense) can be written-off to the APIC pool Only applicable when there is an APIC pool (a memorandum account of prior realized excess tax benefits not previously offset by prior shortfalls) Write-off to APIC (the memorandum account) is done net of VA (so important to allocate the VA to DTAs prior to considering) There has even been differences of opinion between practitioners regarding whether an excess tax benefit had to be realized and credited to the APIC pool prior to being used to offset a shortfall related tax expense (i.e., were shortfalls and excess deductions accounted for individually or in aggregate)

Share-Based Payments ASU 2016-09 (issued March 30, 2016)
Description Old New Excess tax benefits – intraperiod allocation Realized benefits of tax return deductions in excess of compensation cost recognized are accounted for as a credit to additional paid-in capital All excess tax benefits and tax deficiencies are to be recognized within the income statement, thus eliminating the concept of “APIC pool” (ASC ) Excess tax benefits – EPS Excess tax benefits/deficiencies are included in calculation of assumed proceeds available to repurchase shares Dilutive EPS (Treasury Stock Method) – Excess tax benefits/tax deficiencies are excluded from calculation of assumed proceeds available to repurchase shares Realization A tax benefit and a credit to additional paid-in capital for the excess deduction would not be recognized until that deduction reduces taxes payable Excess tax benefits are recognized regardless of whether the benefit reduces taxes payable in the current period Cash flow Present excess tax benefits as a cash inflow from financing activities and a cash outflow from operating activities Excess tax benefits are not presented separately from other income tax cash flows and, thus, classified along with other cash flows as an operating activity Interim N/A for excess benefits Excess tax benefits or deficiencies are discrete items in the interim reporting period in which they occur (i.e., not considered in AETR) (ASC ) Forfeitures Compensation cost accruals are based upon an estimate of the number of awards that are expected to vest An entity can elect to continue to account for forfeitures based upon an estimate of the number of awards that are expected to vest, or can account for forfeitures when they occur. This slides shows the "Accounting guidance related to income taxes” (the ASU contains several other changes that affect accounting for the pretax SBP awards)

Share-Based Payments ASU-2016-09 (issued March 30, 2016) (cont.)
Transition guidance - Accounting for income taxes Excess tax benefits and deficiencies – Prospective (ASC (e)(1)) Previously unrecognized excess tax benefits – Modified retrospective (retained earnings) (ASC (e)(2)) Cash flow statement presentation – Prospective or retrospective (ASC ) Effective date Public entities – annual periods, including interim periods within those annual periods, beginning after December 15, 2016 Non-public entities – one year later Early adoption is permitted; if elected in an interim period, any adjustments should be reflected as of the beginning of the annual period that includes that interim period

ASU 2016-09 APIC (current accounting) vs. Tax Expense (new accounting)
Company A grants a nonqualified stock option $30 fair value, fully vested at grant date in 20X1 Strike price equals market price on date of grant = $40 40% tax rate $80 share price upon exercise in 20X2 As a result of the grant and exercise of the NQSO, Company A recognizes the following income tax expense/(benefits) and APIC impact: Old Guidance New Guidance 20X1 – Income Tax Expense/(Benefit) ($ 12) 20X1 – SBC DTA $ 12 $ 12 20X2 – SBC DTA ($ 12) 20X2 – Income Tax Expense/(Benefit) $ 0 ($ 4) 20X2 – APIC N/A DTR May 2015

ASU 2016-09 FN 82 (realization of taxes payable) Eliminated
Company A grants a nonqualified stock option $30 fair value, fully vested at grant date in 20X1 Strike price equals market price on date of grant = $40 40% tax rate $80 share price upon exercise in 20X2 Company A is in a NOL in 20X2 and the NOL is greater than $10 As a result of the grant and exercise of the NQSO, Company A recognizes the following income tax expense/(benefits) and NOL DTA: Old Guidance New Guidance 20X1 – Income Tax Expense/(Benefit) ($ 12) ($ 12) 20X1 – SBC DTA $ 12 $ 12 20X2 – SBC DTA 20X2 – Income Tax Expense/(Benefit) $ 0 ($ 4) 20X2 – NOL DTA $ 16 Modified - DTR May 2015

ASU 2016-09 FN 82 (realization of taxes payable) Eliminated (cont.)
Transition Entry – if adopted in 20X3 20X3 – Retained earnings ($ 4) 20X3 – NOL DTA $ 4 Modified - DTR May 2015

Consolidated Statement of Cash Flows
ASU Cash Flows Statement (present accounting vs. new accounting) Company ABC Consolidated Statement of Cash Flows 20X3 Old Accounting New Accounting Cash and cash equivalents, beginning of period $ 8,000 Operating activities: Net income (loss) 200 Changes in accruals and reserves 100 Excess tax benefits from stock-based compensation (80) - Investing activities: Purchase of property and equipment (3,300) Financing activities: 80 Net increase(decrease) in cash/cash equivalents (3,000) Cash and cash equivalents, end of period $ 5,000 Finance Executive Briefing_ASC 740_07_03_2016 v4

ASU 2016-09 Cash Flows Statement (new guidance)
> > Cash Flows from Financing Activities All of the following are cash outflows for financing activities: a. Payments of dividends or other distributions to owners, including outlays to reacquire the entity’s equity instruments. Cash paid to a tax authority by an employer when withholding shares from an employee’s award for tax-withholding purposes shall be considered an outlay to reacquire the entity’s equity instruments. Finance Executive Briefing_ASC 740_07_03_2016 v4

ASU 2016-09: Frequently Asked Questions
FAQ #1 If excess tax deductions and shortfalls impact tax expense, should they be forecasted for purposes of the AETR? No - the ASU specifically says that the tax expense or tax benefit related to an excess tax deduction or shortfall should be recognized in the interim period that it occurs in. Question Answer: New slide

FAQ #2 How does an entity determine the amount of the discrete item related to excess tax benefits or tax deficiencies? Historically, for intraperiod allocation considerations, the following three approaches have been generally accepted for the calculation of the tax effects of excess tax benefits and tax deficiencies: Direct effect — Difference between (1) the actual tax deduction multiplied by the applicable tax rate (i.e., excludes indirect effects) and (2) the deferred tax asset recognized. Question Answer: Heads Up – June 20, 2016, Volume 23, Issue 19: Frequently Asked Questions About ASU 16. How does an entity determine the amount of the discrete item related to excess tax benefits or tax deficiencies? Historically, for intraperiod allocation considerations, the following three approaches have been generally accepted for the calculation of the tax effects of excess tax benefits and tax deficiencies: • Direct effect — Difference between (1) the actual tax deduction multiplied by the applicable tax rate (i.e., excludes indirect effects) and (2) the deferred tax asset recognized. • Full ASC 740 “with-and-without” — Difference between (1) the entire incremental tax effect (i.e., includes indirect effects) of the actual tax deduction and (2) the entire incremental tax effect of the cumulative amount of compensation costs recognized for book purposes as if it were the actual tax deduction. • Entire incremental effect — Difference between (1) the entire incremental tax effect (i.e., includes indirect effects) of the actual deduction and (2) the deferred tax asset recognized. These approaches4 would continue to be appropriate for determining the amount of excess tax benefits or tax deficiencies to be recognized in the financial statements after the effective date of the adoption. For more information about the three approaches, see Section 10.16, “Measuring the Excess Tax Benefit Associated With Share-Based Compensation: Tax Credits and Other Items That Affect the ETR,” of Deloitte’s A Roadmap to Accounting for Income Taxes.

FAQ #2 – Answer (cont.) Answer: Full ASC 740 “with-and-without” — Difference between (1) the entire incremental tax effect (i.e., includes indirect effects) of the actual tax deduction and (2) the entire incremental tax effect of the cumulative amount of compensation costs recognized for book purposes as if it were the actual tax deduction. Entire incremental effect — Difference between (1) the entire incremental tax effect (i.e., includes indirect effects) of the actual deduction and (2) the deferred tax asset recognized. These approaches would continue to be appropriate for determining the amount of excess tax benefits or tax deficiencies to be recognized in the financial statements after the effective date of the adoption. Note: The approach chosen is treated as an accounting policy decision and should be applied consistently. Heads Up – June 20, 2016, Volume 23, Issue 19: Frequently Asked Questions About ASU 16. How does an entity determine the amount of the discrete item related to excess tax benefits or tax deficiencies? Historically, for intraperiod allocation considerations, the following three approaches have been generally accepted for the calculation of the tax effects of excess tax benefits and tax deficiencies: • Direct effect — Difference between (1) the actual tax deduction multiplied by the applicable tax rate (i.e., excludes indirect effects) and (2) the deferred tax asset recognized. • Full ASC 740 “with-and-without” — Difference between (1) the entire incremental tax effect (i.e., includes indirect effects) of the actual tax deduction and (2) the entire incremental tax effect of the cumulative amount of compensation costs recognized for book purposes as if it were the actual tax deduction. • Entire incremental effect — Difference between (1) the entire incremental tax effect (i.e., includes indirect effects) of the actual deduction and (2) the deferred tax asset recognized. These approaches4 would continue to be appropriate for determining the amount of excess tax benefits or tax deficiencies to be recognized in the financial statements after the effective date of the adoption. For more information about the three approaches, see Section 10.16, “Measuring the Excess Tax Benefit Associated With Share-Based Compensation: Tax Credits and Other Items That Affect the ETR,” of Deloitte’s A Roadmap to Accounting for Income Taxes.

FAQ #2 Example Facts: Company forecasts pre-tax income of $1,000 for the year and has YTD income of $200 Company previously recognized $200 of stock-based compensation (“SBC”) for which a DTA of $80 was recorded (assume a 40% tax rate) In the CY, the Company has a deduction for SBC of $300 which results in an excess tax deduction of $100 The Company generates an R&D credit inclusive of $110 which is made up of the following: $80 related to non-SBC qualifying expenditures $20 related to historical SBC expenses $10 related to excess tax deductions For interim purposes, how should the excess tax benefit be measured? Question Heads Up – June 20, 2016, Volume 23, Issue 19: Frequently Asked Questions About ASU 16. How does an entity determine the amount of the discrete item related to excess tax benefits or tax deficiencies? Historically, for intraperiod allocation considerations, the following three approaches have been generally accepted for the calculation of the tax effects of excess tax benefits and tax deficiencies: • Direct effect — Difference between (1) the actual tax deduction multiplied by the applicable tax rate (i.e., excludes indirect effects) and (2) the deferred tax asset recognized. • Full ASC 740 “with-and-without” — Difference between (1) the entire incremental tax effect (i.e., includes indirect effects) of the actual tax deduction and (2) the entire incremental tax effect of the cumulative amount of compensation costs recognized for book purposes as if it were the actual tax deduction. • Entire incremental effect — Difference between (1) the entire incremental tax effect (i.e., includes indirect effects) of the actual deduction and (2) the deferred tax asset recognized. These approaches4 would continue to be appropriate for determining the amount of excess tax benefits or tax deficiencies to be recognized in the financial statements after the effective date of the adoption. For more information about the three approaches, see Section 10.16, “Measuring the Excess Tax Benefit Associated With Share-Based Compensation: Tax Credits and Other Items That Affect the ETR,” of Deloitte’s A Roadmap to Accounting for Income Taxes.

FAQ #2 – Example (cont.) Answer: Description Direct effect Full ASC 740 “With-and-without” Entire incremental effect Forecasted Pre-tax Income $1,000 Tax Rate 40% Tax Expense Before R&D Credit $400 R&D Credit ($110) ($100) ($80) Total Tax Expense $290 $300 $320 AETR 29% 30% 32% YTD Income $200 YTD Expense $58 $60 $64 Excess Tax Benefit ($40) ($70)* Excess Tax Benefit – R&D Credit $0 ($10) YTD Tax Expense $18 $10 ($6) Effective Tax Rate 9% 5% (3%) Excess Tax Benefit = Total incremental benefit of $150 (direct incremental benefit** + indirect incremental benefit***) less DTA recognized of $80 ** Direct incremental benefit = $120 ($300 x 40%) ***Indirect incremental benefit = $30 (total R&D credit of $110 less $80 of credit without SBC) Heads Up – June 20, 2016, Volume 23, Issue 19: Frequently Asked Questions About ASU 16. How does an entity determine the amount of the discrete item related to excess tax benefits or tax deficiencies? Historically, for intraperiod allocation considerations, the following three approaches have been generally accepted for the calculation of the tax effects of excess tax benefits and tax deficiencies: • Direct effect — Difference between (1) the actual tax deduction multiplied by the applicable tax rate (i.e., excludes indirect effects) and (2) the deferred tax asset recognized. • Full ASC 740 “with-and-without” — Difference between (1) the entire incremental tax effect (i.e., includes indirect effects) of the actual tax deduction and (2) the entire incremental tax effect of the cumulative amount of compensation costs recognized for book purposes as if it were the actual tax deduction. • Entire incremental effect — Difference between (1) the entire incremental tax effect (i.e., includes indirect effects) of the actual deduction and (2) the deferred tax asset recognized. These approaches4 would continue to be appropriate for determining the amount of excess tax benefits or tax deficiencies to be recognized in the financial statements after the effective date of the adoption. For more information about the three approaches, see Section 10.16, “Measuring the Excess Tax Benefit Associated With Share-Based Compensation: Tax Credits and Other Items That Affect the ETR,” of Deloitte’s A Roadmap to Accounting for Income Taxes.

FAQ #3 Question May an entity change its accounting policy and approach (see question 2 above) for determining the discrete amount related to excess tax benefits and tax deficiencies upon the adoption of ASU ? Yes. Given the lack of definitive guidance on this topic in ASU , upon adoption entities may choose a new policy and approach for determining the amount related to excess tax benefits and tax deficiencies. Entities should consistently apply that approach after adoption Answer: Heads Up – June 20, 2016, Volume 23, Issue 19: Frequently Asked Questions About ASU 17. May an entity change its accounting policy and approach (see question 16 above) for determining the discrete amount related to excess tax benefits and tax deficiencies upon the adoption of ASU ? Yes. Given the lack of definitive guidance on this topic in ASU , upon adoption entities may choose a new policy and approach for determining the amount related to excess tax benefits and tax deficiencies. Entities should consistently apply that approach after adoption.

FAQ #4 How does a company transition from the prior accounting guidance to the new accounting guidance? As it relates to the elimination of FN 82 (no benefit until realized as a reduction in taxes payable) that is adopted on a modified retrospective basis as of the beginning of the year of adoption (either 2016 or 2017). As it relates to the tax effects of excess tax deduction and shortfalls being recognized in tax expense, that change is prospective and would start applying in the year of adoption and would apply to each interim period within that year. Question Answer: New slide

FAQ #5 Question If the DTA recognized upon adoption (i.e., as part of the modified retrospective transition entry) is offset by a valuation allowance, does the recognition of the valuation allowance increase tax expense? No, if a valuation allowance is required for the DTA recognized in the "modified retrospective transition" entry, the balancing entry to retained earnings is adjusted. Answer: New slide

FAQ #6 Question : Can a company early adopt in an interim period other than its first fiscal quarter? Yes. ASU permits companies to early adopt in any interim or annual period for financial statements that have not been issued or have not been made available for issuance. The modified retrospective entry (DTA/VA/RE) would still be determined as of the start of the year and any application of the current accounting in prior interim periods would be "replaced" with accounting under the new guidance (i.e., debits or credits recognized in APIC would now be recognized in tax expense). Answer: Heads Up – June 20, 2016, Volume 23, Issue 19: Frequently Asked Questions About ASU 5. Can an entity early adopt ASU , including in an interim period other than its first fiscal quarter? Yes. ASU permits entities to early adopt in any interim or annual period for financial statements that have not been issued or have not been made available for issuance. 7. If an entity early adopts ASU in an interim period other than its first fiscal quarter, how does the entity apply the amendments that must be adopted on a modified retrospective basis or prospective basis? When an entity early adopts ASU in an interim period other than its first fiscal quarter, it does so as of the beginning of its fiscal year. For amendments that are to be applied on a modified retrospective basis (e.g., previously unrecognized excess tax benefits), a cumulative-effect adjustment is calculated on the first day of the fiscal year of adoption and recorded in retained earnings. For amendments that are to be applied on a prospective basis (e.g., excess tax benefits and tax deficiencies), the change is reflected in the applicable interim periods of adoption such that any adjustments are reflected as of the beginning of the fiscal year. Corresponding changes to the balance sheet, income statement, and statement of cash flows must be made to reflect the adoption of ASU in each interim period, including interim periods for which financial statements have been previously issued or previously made available for issuance. Accordingly, an entity adopting ASU on an interim date other than its first fiscal quarter (e.g., its second fiscal quarter) will be required to recast its previously issued interim financial statements (e.g., its first fiscal quarter) to reflect the adoption of the standard as of the beginning of its fiscal year. For SEC registrants, a previously issued Form 10-Q does not need to be amended and reissued; however, in future filings (e.g., Form 10-Q, Form 10-K, or registration statements) that include the previously issued interim financial information, registrants will present such interim financial information on a recasted basis to reflect the adoption of ASU as of the beginning of the fiscal year.

FAQ #7 Question : Can a company just adopt the tax elements of the ASU in 2016 and the remainder of the ASU in 2017? No. If a company adopts the ASU, it must adopt the ASU in its entirety. Answer: New slide

FAQ #8 Facts: Prior to adopting ASU , the Company has the following: $100 UTB liability related to its meals and entertainment expenses $500 of R&D credits all of which are off-balance sheet (i.e., attributable to excess tax benefits) 40% tax rate Should the DTA recognized from adopting the ASU be considered when applying ASU ? Question New slide

FAQ #8 (cont.) Answer: Yes, after the DTA is recognized, a UTB that would not be payable but rather reduce the DTA recognized in the transition entry should be offset against the DTA after the DTA has been recognized as an increase in retained earnings. Further, such UTBs should be considered as part of the assessment of the realizability of the DTA being recognized. Upon adoption, the Company will record the following to recognize the previously unrecognized excess tax benefits Dr: Deferred tax asset $500 Cr: Retained Earnings ($500) The Company will net the UTB liability of $100 against its DTA for R&D credits (pursuant to ASC A) as follows: Dr: UTB Liability $100 Cr: Deferred tax asset ($100) New slide

FAQ #9 Question Can the other provisions of the ASU have an income tax accounting impact? Yes, one example is if a company elects to account for forfeitures as they occur, that may result in an adjustment to the cumulative book compensation expense recognized to date. The DTA will need to be remeasured accordingly with the change similarly being recognized in retained earnings. Answer: New slide

Share-Based Payments – Sample Disclosure

Share-based payments Example disclosures ASU 2016-09
…XYZ recognized compensation expense of $X million, $X million, and $X million for stock options during 2016, 2015, and 2014, respectively, which is included within other selling and administrative expenses in the consolidated statements of operations. Income tax benefits related to stock option activity during 2016, 2015, and 2014 totaled $X million, $X million, and $X million, respectively. The income tax benefit related to stock options includes $X million recognized as a result of the adoption of ASU Example 2 ASU No "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" was issued in March 2016 and early adopted by the Company in the first quarter of fiscal ASU No eliminates additional paid in capital ("APIC") pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. This requirement is to be adopted prospectively by the Company. The impact of this section of the standard was a benefit of $X to income tax expense for the first quarter of fiscal In addition, the ASU requires that the excess tax benefit be removed from the overall calculation of diluted shares. The impact on diluted earnings per share of this adoption was not material. Finally, modified retrospective adoption of ASC eliminates the requirement that excess tax benefits be realized (i.e. through a reduction in income taxes payable) before they are recognized. The adoption of this section had no impact on the financial statements. Example 1: Mattel Inc. – relationship client (PWC auditors) – LCSP approval from both Michelle Kerrick and Greg Dunlap Example 2: Casey’s General Stores, Inc. – relationship client (KPMG auditors) – LCSP approval obtained from Daniel Kinsella

Course Conclusion

Questions? Answer any last questions. Remind them that the evaluation must be completed.

Speaker Bios Paul Rasmussen Sandy Shurin Relevant Experience
Tax Senior Manager Deloitte Tax LLP Houston, TX Phone Sandy Shurin Tax Senior Manager Deloitte Tax LLP Houston, TX Phone Relevant Experience Paul is a senior manager in the federal tax practice dedicated to providing tax provision and compliance services to companies in a number of different industries. He has provided services to companies within both the public and private sectors and has experience with corporate and partnership tax structures. Paul works on a number of tax provision preparation and attest engagements covering financial reporting under both US GAAP and IFRS. Paul also currently serves in a support role within Deloitte Tax LLP’s Central Region Financial Accounting & Reporting – Income Taxes Competency group. Paul has been an instructor for internal ASC trainings at both a local and national level. Education Paul received a Bachelor of Science degree in Accounting and a Masters degree in Accounting from Brigham Young University. Relevant Experience Sandy Shurin is a Senior Manager in Deloitte’s Global Rewards practice, who primarily focuses on the tax, regulatory and accounting issues that impact the rewards programs of US and non US employers. As a global compensation consultant with specialized experience in the area of long-term incentive plans, Sandy has assisted public and private companies with the thorough review of current processes and outstanding equity and non-equity based awards to identify not only compliance concerns but also opportunities for tax optimization and operational efficiencies. Sandy has been a speaker at local, regional and national industry events on various topic related to global compensation, serves on the Board of Houston chapter of the National Association of Stock Plan Professionals (NASPP), and is the incoming Chair of the American Bar Association (ABA) Section on Taxation Subcommittee on Executive Compensation, Fringe Benefits and Federal Securities Issues. Education Sandy received a Bachelor of Finance degree from The Pennsylvania State University and a J.D. from Washington and Lee University School of Law.

Agenda Introduction 5 min Current and New Guidance 20 min FAQs 25 min

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Agenda Introduction 5 min Current and New Guidance 20 min FAQs 25 min

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