United States

Substantial accounting changes for nonemployee share-based payments

WHITE PAPER  | 

The Financial Accounting Standards Board’s recently updated guidance to align nonemployee share-based payment accounting with employee share-based payment accounting will result in significant measurement changes. Most notable is elimination of the measurement guidance for situations in which compensation cost recognition was appropriate prior to the completion of service, which required estimates of fair value at each reporting period. Instead, grantors of nonemployee share-based payments will measure an equity-classified award one time, at the grant date, except to reflect award modifications or changes in actual or expected outcomes (e.g., forfeitures and performance obligations), and in other limited situations. 

Accounting Standards Update (ASU) 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, expands the scope of Topic 718 of the FASB’s Accounting Standards Codification, “Compensation – Stock Compensation,” to include share-based payment transactions for acquiring goods and services from nonemployees, providing relief for companies experiencing significant challenges valuing stock-based compensation, particularly privately held companies. Non-public start-up companies that issue stock to vendors and independent contractors in exchange for property, services or any other form of asset other than cash are given options to simplify fair value pricing. To assist in understanding the new guidance in ASU 2018-07, we have prepared a white paper, Substantial accounting changes for nonemployee share-based payments.

Subtopic 505-50, “Equity—Equity-Based Payments to Non-Employees,” which currently addresses aspects of the accounting for nonemployee share-based payment transactions, is superseded in its entirety by the new guidance. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For nonpublic entities, the amendments are effective for fiscal periods 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.” 

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