New accounting for LLP profits interest awards

The terms, characteristics and conditions of each award was to be evaluated to inform judgment as to whether to account for the award under ASC 718 or 710. Interestingly, however, many, if not most, profits interest agreements specifically stated the avoidance of share-based compensation in order to prevent taxable compensation to the grantee under US IRC Section 409A. Not surprisingly, seemingly most private middle market companies chose the ASC 710, or bonus approach, rather than treatment as share-based compensation under ASC 718. This approach did not require the cost or effort of a valuation of the award and was consistent with the tax treatment.

Scope

This ASU applies to all reporting entities that account for profits interest or similar awards as compensation to employees or nonemployees in return for goods or services.

Main Provisions

The ASU contains a very thorough example that has four cases with varying fact patterns each highlighting key considerations to help an entity evaluate typical terms and characteristics of such awards. While not all-encompassing, the example should be very valuable in helping to evaluate a number of varied situations. Importantly, I found the example and the four cases to be logical and easy to follow. Do note that more of these awards will now have differing GAAP and tax treatment.

Disclosures follow the guidance provided in either ASC 710 or 718 based on the determination for each specific award.

Effective Dates

These amendments are effective for all fiscal years beginning after 15 December 2025; early adoption is permitted. These provisions should be applied either 1) retrospectively to all prior periods presented or 2) prospectively to profits interest or similar awards granted or modified after the adoption date. Awards granted prior to adoption will not be affected.

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Jeffrey A. Ford is a Founding & Managing Partner at Grossman Yanak & Ford LLP. He has over 30 years of experience, focused in audit and assurance, M&A transactions, and technology consulting. Jeff has served on a variety of ownership groups including public and private companies, private equity groups and international investors.