Morgan Stanley making positive comments on MNST, STZ, NWL citing new stock compensation accounting rule
- The FASB recently issued a new standard (ASU 2016-09) requiring all excess tax benefits, or 'windfall' tax deductions, to be recognized in income and presented as operating cash flows (see below for a list of companies that have already reflected this change in accounting method). To put it simply, companies who issue share-based compensation (options/restricted stock/etc) will be required to account for any tax impact above (or below) what was originally expected when the compensation was granted. Said another way, an excess tax benefit (or deficiency) arises when a company takes an actual tax deduction that is greater (or less) than the deduction that was expected when the corresponding share-based awards were granted.
- For instance, take an award valued at $100 on the grant date that vests over 2 years. The company expects a tax deduction at the grant date of $35, based on a 35% tax rate. If the underlying award is valued at $200 after vesting, then the actual tax deduction is $70 ($200 x 35%), resulting in an 'excess' benefit of $35.