Fortune 500 Sees First Signs of Tax Volatility from ASU 2016-09

Over the summer, I spoke with Bloomberg about their study of the aftermath of Accounting Standards Update 2016-09 (ASU 2016-09). You can read it here, or here. It’s an interesting read that focuses on tax volatility and disclosure quality. If you’re in a hurry, here are the main points:

  1. ASU 2016-09 essentially pegs earnings to stock prices. For many companies, that’s created a tax windfall thanks to our current bull market. But if the market heads south, all that will invert.
  2. Bloomberg’s examination of the top 50 companies in the Fortune 500 shows that the effective tax rate dropped an average of 5% thanks to ASU 2016-09. Even more noteworthy, this impact has been happening in the quarter where an annual grant vests (usually Q1), since tax benefits and deficiencies are discrete items.
  3. Disclosure quality has been hit or miss. It’s not too late to take a critical look at your disclosures and benchmark them against some of the better disclosures released so far. We’re happy to explain which disclosures we think are best in class.
  4. Even if you take a “less is more” approach to disclosure, don’t dismiss the value of building strong internal processes to forecast future tax benefits and deficiencies across a range of stock price and other scenarios. This is the best way to avoid budget surprises.

We’ve spent a lot of time over the last few years helping our clients prepare for ASU 2016-09 adoption. Our main focus has been the earnings and effective tax rate volatility stemming from elimination of the APIC pool, which is why we’ve helped many clients set up tax settlement forecasting procedures. Check out our services and article library to learn more.

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