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FASB issues final ASU on profits interest awards

Defining Issues | March 2024

ASU 2024-01 provides four cases illustrating the scope application of ASC 718 for profits interest awards.

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The determination of whether profits interest awards are share-based payment arrangements in the scope of ASC 718, or like a cash bonus or profit-sharing arrangement in the scope of ASC 710,  requires judgment. The new illustrative example clarifies whether the guidance in ASC 718 should be applied to profits interest awards.

Applicability

Relevant dates

  • All entities that account for profits interest awards

Effective date

Public entities

All other entities

Annual periods – Fiscal years beginning after

December 15, 2024

December 15, 2025

Interim periods – In fiscal years beginning after

December 15, 2024

December 15, 2025

Early adoption is permitted.

 

 

Key impacts

Determining whether a profits interest award should be accounted for as a share-based payment arrangement or other compensation requires judgement based on the facts and circumstances of the specific transaction. 

The Private Company Council (PCC) identified scope application issues related to accounting for profits interest awards and recommended that the FASB add a project to address these issues, which impact both private and public business entities who issue profits interest and other similar awards. In response, the FASB added a project to its agenda in December 2022 and, on March 20, 2024, issued ASU 2024-01 which provides an illustrative example.  

The illustrative example includes four fact patterns to demonstrate how an entity would apply the scope guidance in paragraph 718-10-15-3 to determine whether profits interest awards should be accounted for in accordance with ASC 718. The ASU is intended to reduce complexity and diversity in practice.

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