The FASB has issued an Exposure Draft intended to clarify the scope of Topic 718, Compensation – Stock Compensation and its application to profits interest awards. The Exposure Draft is in response to concerns that there is diversity in practice regarding the accounting for profits interest awards as either a share-based payment arrangement under Topic 718, Compensation – Stock Compensation, or as a profit sharing or cash bonus arrangement under Topic 710, Compensation - General.

The Exposure Draft includes four illustrative fact patterns regarding profits interest awards to demonstrate how entities are to apply the scope criteria of Topic 718. The specific condition addressed is paragraph 718-10-15-3(a) which states that “the amounts are based, at least in part, on the price of the entity’s shares or other equity instruments.” Some of the key fact patterns addressed in the illustrative examples include situations where the profits interest awards vest only upon a liquidation event, situations where the profits interest awards are forfeitable upon termination, and situations where the profits interest awards are linked to financial metrics but do not participate pro-rata with shareholders.

Comments are due to the FASB on the Exposure Draft by July 10, 2023. The potential effective date and transition method if this Exposure Draft were to be issued have not yet been determined.

The full text of the Exposure Draft can be found here.

^{Readers should not act upon information presented without individual professional consultation.}