Dive Brief:
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The Financial Accounting Standards Board issued a formal proposal Thursday to clarify existing guidance on generally accepted accounting principles related to profits interest, a form of compensation also known as carried interest, which is effectively a kind of stock-like share in the value of private companies.
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The new guidelines in the exposure draft now out for public comment are designed to help report preparers determine whether profits interest-type awards should be treated as a “share-based arrangement within the scope of Topic 718, Compensation-Stock Compensation.” Comments from stakeholders are due by July 10.
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The move comes as there are varied ways that the current guidance is being put into practice, with some treating it as a share-based payment arrangement while others have treated it as a cash bonus or profit-sharing arrangement (Topic 710, Compensation — General, or other Topics), according to the release.
Dive Insight:
The tax implications of carried interest were drawn into a political firestorm last summer. Senate Democrats sought to modify rules on it in the tax code and critics decried it as a tax loophole that benefits fund managers and others in private equity whose compensation is tied to it. Ultimately, the proposed change was cut out of the Inflation Reduction Act.
In contrast, the latest proposed clarification related to the accounting treatment of carried interest isn’t likely to make the same kind of waves. Taxes on the awards have been controversial for hedge fund managers and others who get paid that way and have it taxed as capital gains in lieu of salary or a cash bonus, said Jack Castonguay, an accounting professor at Hofstra University in New York, in an emailed response to questions. But for the entity issuing the award, carried interest’s accounting issues are “noncontroversial,” Castonguay stated.
The FASB’s new clarifications give firms “a roadmap” to determine whether to account for the awards as stock options or bonuses but it won’t impact salaries at all, he wrote. “I don’t think executives will worry about this guidance.”
