There is little question that the accounting for share-based payment awards was among the most time consuming and complex areas of U.S. GAAP. After providing a number of practical expedients to help simplify the accounting for share-based payment awards to employees, the Financial Accounting Standards Board (FASB) turned its attention to simplifying the accounting for share-based payment awards to non-employees. The FASB issued an Accounting Standards Update (ASU 2018-07) to reduce both cost and complexity and improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers.).
A closer look at ASU 2018-07 reveals why accounting for share-based payment accounting had to change, and the importance of the work being done by the FASB’s ongoing Simplification Initiative.
Tackling the Needlessly Complicated
The objective of the Simplification Initiative is to maintain or improve the usefulness of the information provided to the users of financial statements while reducing cost and complexity in financial reporting. It’s no wonder that the Simplification Initiative picked up on share-based payment accounting. Under current standards, entities apply two separate models for measuring and recognizing share-based payment awards, one for employee payments and one for non employee payments. Many within the financial reporting community have observed that having these two models provided little added value to users of financial statements. ASU 2018-07 expands the scope of Topic 718, Compensation-Stock Compensation to effectively align the accounting for share-based payments for non-employees with the accounting for share-based awards to employees.
Adjusting to Changing Trends
Beyond the benefits of a single accounting model for the measurement and recognition of share-based payment awards, ASU 2018-07 ends the requirement under Subtopic 505-50 to “mark to market” the unvested portion of share-based payment awards issued to non-employees. This treatment was required even though the terms and conditions of the non-employee awards may have been identical to employee awards classified as an “equity” award and therefore subject to measurement at the date of grant (and not subsequently remeasured under ASC Topic 718).The alignment of the accounting for non employee awards with ASC Topic 718 will certainly reduce the amount of income statement volatility associated with non-employee awards.
There was a compelling business reason to supersede the guidance in Subtopic 505-50 as well. The origins of Subtopic 505-50 harken back to a period of economic growth in the mid to late nineties, which saw an increase in the distribution of share-based payment awards to independent contractors and consultants outside of the traditional “upper management” award recipients. In its consideration of EITF Issue 96-18, the FASB noted the practice of many independent contractors and consultants to frequently change jobs in order to time the next “upswing” in market valuation. Recently, the FASB has acknowledged that employees can (and now more frequently do) change jobs. These changes in business trends undermine the justification for having two separate accounting models for employee versus non-employee share-based payments.
The FASB’s Simplification Initiative is Paying Off
When first announced, the FASB’s Simplification Initiative was easy to support as the complexity and burden of financial reporting seemingly had reached an all-time high. However, a good idea still has to be implemented in a manner that produces the results that were intended. The FASB has been extremely active in establishing dialog with its various constituencies. The dialog has been inclusive of a significant number of interested parties from the financial reporting community as well as the user community, which the changes to accounting for non-employee payments demonstrates.
While it is impossible to please all people all of the time, the FASB appears to be succeeding in its goal to simplify accounting and reduce the related burden. Some could argue that the significant amount of change brought on by the Simplification Initiative is in-of-itself burdensome, but the vast majority of those involved in the financial reporting community are likely benefiting from the FASB’s Simplification Initiative, which may well be the true measure of its success.
Evaluate with Caution
The new guidance provided by ASU 2018-07 is effective for public business entities with fiscal years beginning after Dec. 15, 2018 with private entities adopting a year later. Early adoption is only permitted if an entity has already adopted ASC Topic 606, Revenue for Contracts with Customers. A more in-depth look at the other changes in ASU 2018-07 can be found here.
For specific comments, questions or concerns about the standard, please contact James Comito of MHM’s Professional Standards Group at firstname.lastname@example.org.
Published on February 05, 2019