The Financial Accounting Standards Board (FASB) has 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. Stakeholders are encouraged to review and provide comments on the proposed ASU by 10 July 2023.

Certain entities, typically private companies, 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).  

As certain public business entities also may be required to account for profits interest awards, the PCC recommended that the Board add a project that would provide illustrative guidance for all reporting entities that account for profits interest and similar awards.