The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-07 Compensation—Stock Compensation (Topic 718) as part of its Simplification Initiative to reduce complexity when accounting for share-based payments to non-employees.
The areas for simplification in ASU 2018-07 involve several aspects of the accounting for non-employee share-based payment transactions resulting from expanding the scope of Accounting Standards Codification (ASC) Topic 718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees and aligning it with the accounting for share-based payments to employees, with certain exceptions.
Upon adoption, an entity should apply the requirements of Topic 718 to non-employee awards, except for specific guidance on the period of time over which share-based payment awards vest and the pattern of cost recognition over that period, as discussed further below. The amendments specify that Topic 718 now applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards.
Equity-classified non-employee awards are now measured on the grant date by estimating the fair value of the equity instruments to be issued. During the vesting period, non-employee awards that contain a performance condition that affects the quantity or other terms (e.g., exercise price) of the award should be measured based on the outcome that is probable.
Entities may use the expected term to measure non-employee awards, or elect to use the contractual term as the expected term, on an award-by-award basis.
Nonpublic entities that measure their liability-classified employee awards using the intrinsic value will need to use the same approach to measure liability-classified non-employee awards.
Entities are now required to reassess the classification of a non-employee award (i.e., equity or debt) under other US GAAP (e.g., ASC Topic 815, Derivatives and Hedging) only if it is modified after it vests and the non-employee is no longer providing goods or services, rather than once performance is complete and the award vests.
ASU 2018-07 retains the current non-employee awards cost attribution (i.e., recognition) guidance, to recognize compensation cost for non-employee awards in the same period and in the same manner they would if they paid cash for the goods or services, but moves the guidance to ASC 718. As a result, if the non-employee provides goods or services at a point in time, the timing of recognition for non-employee awards will continue to differ from the timing of recognition for employee awards (recognized ratably over the service period).
Similar to the accounting policy election for employee awards the guidance allows entities to make an accounting policy election to either account for forfeitures of non-employee awards as they occur or estimate forfeitures and adjust the estimate when it is likely to change, however the new guidance allows an entity to make separate accounting policy elections for employee and non-employee awards in this regard.
Summary of Differences between Current GAAP and ASU 2018-07
|Current GAAP || |
Impact from ASU 2018-07
Measurement Date: The measurement date for equity-classified non-employee share-based payment awards is the earlier of the date at which a commitment for performance by the counterparty is reached and the date at which the counterparty's performance is complete.
Equity-classified non-employee share-based payment awards are measured at the grant date. The definition of the term grant date is amended to generally state the date at which a grantor and a grantee reach a mutual understanding of the key terms and conditions of a share-based payment award.
Awards with Performance Conditions: Non-employee share-based payment awards with performance conditions are measured at the lowest aggregate fair value.
Consistent with the accounting for employee share-based payment awards, an entity considers the probability of satisfying performance conditions when non-employee share-based payment awards contain such conditions.
Classification Reassessment of Certain Equity-Classified Awards: Generally, the classification of equity-classified non-employee share-based payment awards is subject to other GAAP (for example, ASC Topic 815, Derivatives and Hedging) once the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. This often results in the need to reassess the classification of such awards.
Generally, the classification of equity-classified non-employee share-based payment awards will continue to be subject to the requirements of Topic 718 unless modified after the good has been delivered, the service has been rendered, any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and the non-employee is no longer providing goods or services. This eliminates the requirement to reassess classification of such awards upon vesting.
Nonpublic Entity-Specific Amendments
Summary of Amendments
Calculated Value: Inputs to the valuation of equity share options and similar instruments issued to non-employees include an estimate of the expected volatility.
Historical volatility of an appropriate industry-sector index is used by nonpublic entities for expected volatilities as inputs to the valuation of share options and similar instruments issued to non-employees when it is not practicable for the nonpublic entity to estimate the expected volatility of its share price.
Intrinsic Value: Entities are required to measure liability-classified non-employee share-based payment awards at fair value.
A nonpublic entity can make a onetime election to switch from measuring liability-classified non-employee share-based payment awards at fair value to intrinsic value. Regardless of the election, liability-classified awards would be subject to remeasurement until exercise.
Nonpublic Entity Practical Expedient
The new guidance allows nonpublic entities to use the midpoint between the vesting date and the contractual term as the expected term for certain non-employee awards with service or performance conditions (even if they use the contractual term to value other non-employee awards), similar to the practical expedient available for employee awards. ASU 2017-08 requires entities to use the same accounting policy for awards to both employees and non-employees.
Timing and Transition
The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity's adoption date of Topic 606, Revenue from Contracts with Customers.
An entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Upon transition, the entity is required to measure these non-employee awards at fair value as of the adoption date.
Assets in progress that include non-employee share-based payment costs, such as work-in-process inventory and construction-in-process, will be remeasured at the adoption date. The entity must not remeasure assets that are completed such as finished goods or equipment placed in use.
Disclosures required at transition include the nature of and reason for the change in accounting principle and, if applicable, quantitative information about the cumulative effect of the change on retained earnings or other components of equity.
For More Information
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Published on June 26, 2018