United States

Proposed accounting simplifications for nonemployee share-based payments


Currently, Subtopic 505-50, Equity—Equity Based Payments to Non-Employees, of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) addresses aspects of the accounting for nonemployee share-based payment transactions. The accounting requirements in Subtopic 505-50 are significantly different from the requirements for employee share-based payment transactions within the scope of ASC Topic 718, Compensation – Stock Compensation.

The FASB recently issued a proposed Accounting Standards Update (ASU), Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which, if finalized, would expand the scope of Topic 718 to also address share-based payments for goods and services to nonemployees. As a result, the accounting for share-based payments to nonemployees and employees would be similar as exemplified in the following provisions of the proposed ASU:

  • Nonemployee share-based payment transactions within the scope of Topic 718 would be measured by estimating the fair value of the equity instruments that an entity is obligated to issue when 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.
  • Equity-classified nonemployee share-based payment awards would be measured at the grant date.
  • An entity would consider the probability of satisfying performance conditions when nonemployee share-based payment awards contain such conditions.
  • Generally, the classification of equity-classified nonemployee share-based payment awards would 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 nonemployee is no longer providing goods or services.

It should be noted that a nonpublic entity could substitute calculated values for expected volatilities as inputs to the valuation of share options and similar instruments issued to nonemployees if it is not practicable for the nonpublic entity to estimate the expected volatility of its share price. Also, a nonpublic entity could make a one-time election to switch from measuring liability-classified nonemployee share-based payment awards at fair value to intrinsic value.

An entity would apply the proposed ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the annual period of adoption. However, a nonpublic entity that substitutes calculated value for fair value when measuring share-based payment awards would apply the proposed amendments prospectively to awards measured after the effective date. The proposed amendments would be applied to only outstanding awards. Disclosures required at transition would 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.

The effective date will be determined after the FASB considers stakeholder feedback. The proposed ASU is available for comment until June 5, 2017.