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17.6 Income tax accounting for stock appreciation rights
Publication date: 31 Dec 2022
us Income taxes guide
A stock appreciation right (SAR) gives an employee the contractual right to receive an amount of cash, stock, or a combination of both that equals the appreciation in an entity’s stock from an award’s grant date to the exercise date. SARs generally resemble stock options in that they may be exercised at the employee’s discretion during the exercise period and do not give the employee an ownership right in the underlying stock. Unlike options, however, SARs generally do not involve payment of an exercise price. How the award is settled (in cash or in stock) also affects the classification of a SAR as either a liability or shareholders’ equity, as discussed in SC 3.3.4.
Figure TX 17-2 compares the income tax accounting for cash-settled SARs and stock-settled SARs.
Figure TX 17-2
Income tax accounting comparison of cash-settled SARs and stock-settled SARs
Income tax accounting comparison of cash-settled SARs and stock-settled SARs
Cash-settled SAR |
Stock-settled SAR |
|
Grant date |
Measure at fair value |
Measure at fair value |
As the award vests |
Remeasure the fair value of the award at each reporting period and adjust cumulative compensation expense (and the corresponding compensation liability) based on the portion of the vested award; adjust the corresponding deferred tax asset based on the temporary difference arising from the book liability. |
Recognize the book compensation cost over the service period based on the grant-date fair value; recognize a deferred tax asset for book compensation expense recognized in advance of the tax deduction. |
After the award has vested but before it is settled |
Remeasure the book compensation liability at fair value and adjust it each reporting period accordingly and adjust the corresponding deferred tax asset. |
No accounting required. |
At the time of settlement |
The deferred tax asset at the time of settlement should equal the current tax benefit, resulting in no excess tax benefit or deficiency. |
Reverse the existing deferred tax asset through income tax expense and recognize any excess tax benefit (or deficiency) in the income statement. |
17.6.1 Income tax accounting for cash-settled SARs
Under ASC 718, cash-settled SARs are classified as liability awards and therefore are remeasured at fair value each reporting period until the award is settled. The related deferred tax asset is adjusted when book compensation cost is recognized each reporting period as the cash-settled SAR is remeasured. When an employee exercises a SAR, the entity’s tax deduction will generally equal the cash payment, which, at the point of settlement, is also the amount of the book compensation liability. If the SAR is cancelled prior to settlement, the liability is reversed, and the deferred tax asset is reversed through income tax expense. If the SAR expires worthless, there would be no accounting entries at the expiration date because, prior to expiration, the SAR and the corresponding deferred tax asset would have been remeasured each reporting period and at some point in time before expiration, the SAR would have no value and there would be no liability or associated deferred tax asset on the books.
17.6.2 Income tax accounting for stock-settled SARs
Stock-settled SARs generally are equity-classified awards under ASC 718. The income tax accounting is identical to that for an equity-classified, nonqualified stock option. In concept, a stock-settled SAR can be thought of as an option with a zero-exercise price. Accordingly, a deferred tax asset is recorded as book compensation cost is recognized. When an employee exercises a stock-settled SAR, the entity measures the amount of the tax deduction based on the award’s intrinsic value at that time and any excess tax benefit or tax deficiency is recorded in the income statement.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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