How will the Financial Accounting Standards Board’s (FASB) new guidance, Accounting Standards Update (ASU) 2018-07, impact share-based payments to nonemployees?
Your company will now benefit from a more cost effective and simplified approach to recognizing costs pertaining to nonemployee share-based compensation. This article will help you stay ahead of the curve by taking you through the most significant changes under this revised pronouncement.
What is ASU 2018-07?
Issued by the FASB on June 20, 2018, ASU 2018-07 eliminates the separate model under ASC 505-50 for equity-based payments to nonemployees. These payments are now treated similarly to share-based payment transactions for employees under ASC 718 — with minor exceptions. This pronouncement does not apply to payments for financing or payments granted when selling goods or services.
Measurement Date Determination
The measurement date for nonemployee awards is now the same as the grant date. Previously, under ASC 505-50, the measurement date was the earlier of either:
- the performance commitment by the counterparty, which was unusual to see in an award; or
- the date when the performance was complete
Under the new streamlined guidance, if the nonemployee award includes a performance condition, the issuer determines the valuation of the compensation at the onset based on the probable outcome. Previously, nonemployee share-based awards with performance conditions were measured at the lowest aggregate fair value within the range of possible outcomes and were adjusted each reporting period accordingly. In some instances, this resulted in no compensation cost being recognized until the performance conditions were met, and often resulted in volatility as the awards were re-measured.
Post-Vesting Classification of Grants
The post-vesting classification is now aligned for employee and nonemployee grants. Aligning with the ASC 718 guidance, the grantor does not reassess classification upon vesting — unless the grants are modified after the goods or service are delivered or performed. This is similar to the way an employee award is treated. Previously, the nonemployee awards followed other guidance upon vesting, such as ASC 815, Derivatives, which would have required reassessment.
Under the new guidance, companies may now measure the term of nonemployee options on an award-by-award basis. They may use either the expected term or the contractual term. Previously, companies had to use the contractual term for measurement of awards.
WHAT HAS NOT CHANGED
Cetain aspects remain, including:
- the attribution of awards is still recognized over the vesting period — as if the company paid cash for the goods or services.
- the company will consider the nature of what it received to ensure the proper period to recognize the cost. For example, if a company issues options upfront for a yearly service, the grant date is the date of the agreement and the expense will be recognized ratably each month throughout the year based on the grant-date fair value.
WHEN THESE CHANGES TAKE EFFECT
The guidance is effective for Public Business Entities in annual periods beginning after December 1, 2018, and interim periods within that fiscal year. For all other entities, it is effective in annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted for entities that have adopted the new revenue guidance, but no earlier than the adoption of ASC 606, the New Revenue Recognition Guidance.
QUESTIONS ON YOUR NEXT STEPS?
Contact your Friedman advisor for guidance on how to effectively navigate these changes to keep your business compliant.