The Financial Accounting Standards Board (FASB) issued a proposal last week calling for clarity in accounting guidance on profits interest. The proposal tries to draw a clearer dividing line between different types of profits interest, to put them in one of two buckets: those that are more akin to share-based payments, and those that aren't.
That might mean if you’re working at an LLC, your compensation package may involve some new accounting quirks in the years ahead.
While LLCs are the most common way that small businesses are formed, the way they handle giving employees a share of the business isn’t what you might be used to. Where corporations frequently offer stock options to employees, LLCs, which don’t have stock, can offer a different incentive to employees, called profits interests, instead.
But according to FASB, the lack of clarity about how to account for profits interest has led to “diversity in practice” in accounting for these awards. Sometimes, FASB wrote, companies account for profits interest as “similar to a cash bonus” and sometimes they have accounted for them as “a share-based payment arrangement.”
At stake is the possibility that employees and company owners could face a variety of different situations when it comes to taxes, depending on how their companies have handled the accounting of profits interest.
The FASB requests comments from stakeholders by July 10.—SW
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