Key Takeaways

  • Introduction of ASU 2024-01: FASB released ASU 2024-01 to enhance clarity and provide detailed examples for the application of profits interest under ASC 718.
  • Expanded Illustrative Guidance: The update includes a new illustrative example that clarifies the scoping guidance for profits interest, helping entities accurately apply ASC 718.
  • Detailed Definition and Application: Reinforces the definition of profits interest via IRS Revenue Procedure 93-27 and outlines its accounting implications under various scenarios within ASC 718 and 710.

Overview of FASB ASU 2024-01: Explaining the Latest Update on Profits Interest Awards

The Financial Accounting Standards Board (FASB) has introduced ASU 2024-01 to enhance clarity around the scope application of profits interest and similar awards. This update, detailed in ASC 718, Compensation-Stock Compensation, includes illustrative guidance to assist reporting entities in accounting for profits interest awards as compensation for services provided by employees or nonemployees.

Defining Profits Interest: Insights from IRS Revenue Procedure 93-27

Profits interest, as defined by IRS Revenue Procedure 93-27, refers to a partnership interest that does not include a capital interest. This type of interest grants rights solely to the future profits and/or equity appreciation of the entity, contrasting with a capital interest that pertains to current net assets. The unique characteristics and terms associated with profits interests often lead to varied accounting practices under ASC 718 or other standards like ASC 710, reflecting the complexity in their treatment.

Main Provisions of ASU 2024-01: A Closer Look at the Updated Guidance on Profits Interest

The ASU provides an illustrative example that outlines four scenarios, demonstrating the application of scope guidance in paragraph 718-10-15-3 for a profits interest or similar award with specific features.

The table presents the fact patterns (Case A through D) from the illustrative example. It summarizes the conclusions regarding the application of the scoping guidance outlined in paragraphs 718-10-15-3 for each case. Please note, the term “Units” in the table specifically refers to the Class B Units as detailed in Example 10 of the ASU.

Main Provisions of ASU 2024-01: Illustrative example that outlines four scenarios.

The image above is a visual representation of the following table.

Illustrative ExampleConclusion – In Scope of 718?Basis for Conclusion
Case AYesUnits in Case A and Case B are classified as share-based payment awards. They qualify as they permit grantees to partake in the residual interests of the entity. This qualification occurs either immediately upon vesting or during an exit event, aligning with the criteria outlined in paragraph 718-10-15-3(a).
Case BYes
Case CYesThe units specified in Case C are not equity instruments of the entity, thus they do not satisfy the criteria outlined in paragraph 718-10-15-3(a). However, they do fulfill the condition specified in paragraph 718-10-15-3(b)(1) as the cash proceeds upon an exit event are determined based on the share price of the entity.
Case DNo, apply other U.S. GAAPThe Units do not satisfy the criteria specified in paragraph 718-10-15-3 due to several reasons:

  • The Units do not grant the holder any equity instruments of the entity.
  • The proceeds derived are not linked to the price of the entity’s shares.
  • There are no conditions under which the entity is obligated to issue its equity shares or other equity instruments.

Understanding ASU 2024-01: No Change to Classification Guidance in ASC 718

The ASU provides additional illustrative guidance to aid in determining whether profits interest and similar awards fall under the scope of ASC 718.  This enhancement should streamline the initial assessment of such awards under the ASU. However, entities must note that merely establishing that an award falls under ASC 718 does not automatically categorize it as equity-classified.  Entities must still evaluate the specific classification guidance within ASC 718-10-25-6 through 25-19A to determine if an award should be treated as equity or as a liability.

The amendment to paragraph 718-10-15-3 in the ASU aims to refine the clarity and applicability of the existing guidelines. Despite this modification, the fundamental intent and application of the guidance remain unchanged. This emphasizes the importance of a meticulous assessment process when classifying any financial awards or interests.

Effective Dates and Transition Overview for ASU

The table outlines the implementation schedule and transitional phases for the ASU:

Public Business EntitiesAll Other Entities
Effective DateFor fiscal years commencing after December 15, 2024, including interim periods within such fiscal years.For fiscal years commencing subsequent to December 15, 2025, including the interim periods within those fiscal years.
Early AdoptionEarly adoption is allowed for any financial statements that have not yet been issued or made publicly available for issuance.
TransitionApplies retrospectively to all previously presented periods. Entities must adhere to disclosure requirements in line with ASC 250-10-50-1 through 50-3.


This applies prospectively to profits interest and similar awards that are granted or modified on or after the date of adoption. Entities are required to disclose both the nature and the reasons for the change in accounting principle.


How LBMC Can Assist with Navigating ASU 2024-01

As the FASB introduces ASU 2024-01 to refine the scope application of profits interest and similar awards, LBMC is equipped to guide your organization through these updated regulatory requirements. Our seasoned professionals possess expertise in ASC 718 implications and are adept at assisting with the intricate considerations of profits interest awards.

Whether your organization needs help determining the scope, application, or classification of these awards under the new ASU, LBMC provides strategic insights and practical solutions. We ensure that your reporting processes align with the latest standards, helping you maintain compliance while optimizing financial and operational performance.

Ready to ensure compliance with the latest FASB updates? Contact LBMC today by filling out this form to schedule a consultation with our accounting standards experts. Let us help you navigate the complexities of profits interest and similar awards with confidence.