If a company records 100 in Tax Benefits from SBC and 40 in Excess Tax Benefits from SBC, what is the impact on the cash flow statements and equity?

• A. CFO from operations increases by 60; CFO financing increases by 40; cash increases by 100; equity increases by 100.
• B. CFO from operations decreases by 60; CFO financing decreases by 40; cash decreases by 100; equity decreases by 100.
• C. CFO from operations unchanged; cash increases by 100; equity unchanged; financing unchanged.
• D. CFO from operations increases by 100; CFO financing decreases by 40; cash increases by 60; equity increases by 60.

Answer: (A)

Under ASC 718 and ASU 2016-09, tax benefits from stock-based compensation are split between cash flows from operating activities and financing activities. The tax benefits that reduce taxes payable and appear in the income statement flow into operating cash flows. Any excess tax benefits beyond what’s recognized in net income are treated as financing activities and increase equity (typically through APIC).

In this scenario, 100 of tax benefits from SBC reduce taxes payable and contribute to operating cash flow, but only part of that effect becomes a direct operating cash inflow. The remaining portion is treated as financing activity: the 40 excess tax benefits. So, operating cash flow rises by 60 (the portion that ultimately affects net income/retained earnings), financing cash flow rises by 40, and the total cash impact is 100 (60 + 40).

Equity increases by 100 because the tax benefits increase retained earnings (from the higher net income) and also add to additional paid-in capital for the excess tax benefits.