FASB’s Guidance on applicability of ASC 718

Certain entities grant special awards in the form of profits interests, for example profits interest which may entitle the interest holder to a portion of any distributions made, once senior interest holders obtain a specified return. Sometimes it can be difficult to determine whether profits interest should be accounted for as Share based payment under ASC 718- Compensation—Stock Compensation or as a performance bonus/ profit-sharing arrangement under ASC 710- Compensation—General, or other Topics.

On March 21, 2024, the FASB issued an Accounting Standard Update 2024-01 (“ASU 2024-01” or “ASU”), which clarifies by adding examples to illustrate the scope application of ASC 718 on how an entity determines whether a profits interest or similar awards (hereinafter also referred to as “profits interest awards”) is (1) within the scope of ASC 718 or (2) not a sharebased payment arrangement and therefore within the scope of other guidance.