Chapter 11 — Income Tax Accounting | DART – Deloitte Accounting Research Tool

ASC 718-740 discusses the accounting for income taxes associated with share-based payment awards. ASC 718-740-25-2 states, in part, that the “cumulative amount of compensation cost recognized for [awards] that ordinarily would result in a future tax deduction under existing tax law [is] considered to be a deductible temporary difference in applying [ASC 740].” Accordingly, entities recognize DTAs and related tax benefits on the basis of cumulative compensation cost recorded for awards that ordinarily would result in future tax deductions. This guidance applies irrespective of whether an award is classified as equity or a liability. If the cost of an award that will ordinarily result in a deduction for tax purposes is capitalized (e.g., as part of inventory or a fixed asset), the capitalized cost also becomes part of the tax basis of the asset.

For awards that would not ordinarily result in future tax deductions, the cumulative amount of compensation cost recognized in the financial statements would be treated as a permanent difference and would be an item (or part of an item) that reconciles the entity’s statutory tax rate to its effective tax rate. For public entities, disclosure of this reconciliation is required by ASC 740-10-50-12. Any capitalized cost of an award that would not ordinarily result in a future deduction would not be treated as part of the tax basis of the asset.

The DTA associated with share-based payment awards (apart from any required valuation allowance) is computed by applying the applicable tax rate to the cumulative amount of compensation cost recognized in the financial statements (i.e., the gross temporary difference) and, for equity-classified awards, is not subsequently affected by changes in the entity’s stock price. An entity should not remeasure or write off the DTA as a result of a change in its stock price. For example, even if an entity’s stock price has declined so significantly that a stock option award’s exercise is unlikely to occur or that the intrinsic value on the exercise date will most likely be less than the cumulative compensation cost recognized in the financial statements, the DTA is not adjusted. However, for share-based payment awards classified as liabilities, the measurement of the DTA does implicitly take into account the entity’s current stock price since liability awards are remeasured at the end of each reporting period. The DTA resulting from compensation cost on liability awards would change as the fair-value-based measure of the awards changes.

The cumulative amount of compensation cost recognized in the financial statements may be greater or less than the amount of actual tax deductions for share-based payment awards (e.g., the tax deduction determined when a restricted stock award vests or when a stock option award is exercised). Differences in such amounts are referred to as excess tax benefits (when the amount of the deduction exceeds the compensation cost recognized in the financial statements) and tax deficiencies (when the amount of the deduction is less than the compensation cost recognized in the financial statements). In accordance with ASC 718-740-35-2, the excess tax benefits and tax deficiencies are recognized as decreases or increases to current tax expense or benefit in the period the excess tax benefit or tax deficiency arises (i.e., the period in which the tax deduction arises or the period in which an option’s expiration occurs). This results in a permanent difference between the amount of cumulative compensation for financial reporting purposes and the deduction taken for income tax purposes and has an impact on an entity’s effective tax rate in the period in which the excess or deficiency arises.

For additional information about the accounting for income taxes associated with share-based payment awards, see Chapter 10 of Deloitte’s Roadmap Income Taxes.