FASB is seeking comments on a proposed Accounting Standards Update (ASU) that is intended to improve GAAP by adding illustrative guidance for entities to determine whether profits interest and similar awards should be accounted for as share-based payment arrangements within the scope of FASB ASC Topic 718, Compensation — Stock Compensation.

Private companies often provide employees and other service providers with a profits interest to align compensation with the company’s operating performance, a FASB news release said, and provide those holders with the opportunity to participate in future profits and/or equity appreciation of the company.

According to the news release, the Private Company Council (PCC) and other stakeholders have highlighted existing diversity in practice in accounting for these awards as share-based payment arrangements under Topic 718 or similar to cash bonus or profit-sharing arrangements (Topic 710, Compensation — General, or other Topics).

As certain public business entities also may be required to account for profits interest awards, the PCC has recommended that FASB add a project that would provide illustrative guidance.