Scope of stock compensation standard widened to align guidance for employee, nonemployee payments

The Financial Accounting Standards Board (FASB) on June 20, 2018, expanded the scope of Accounting Standards Codification (ASC) 718, Compensation – Stock Compensation, to include share-based payments to nonemployees for goods and services.

The accounting board said the amendments in Accounting Standards Update (ASU) No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, align the guidance for stock compensation to employees and nonemployees. The amended guidance replaces ASC 505-50, Equity—Equity-Based Payments to Non-Employees.

“This standard will make it easier for companies to account for the share-based payments they provide to service providers, suppliers and other people that are not employees,” FASB Chairman Russell Golden said in a statement.

The amendments in ASU No. 2018-07 apply “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,” the FASB said. But the amended guidance does not cover stock compensation that is used to provide financing to the company that issued the shares or stock awards tied to a sale of goods or services as part of a contract accounted for according to ASC 606, Revenue From Contracts With Customers.

The FASB said the amendments in ASU No. 2018-07 apply to “all entities that enter into share-based payment transactions for acquiring goods and services from nonemployees.”

The amendments are effective for public companies for fiscal years that begin after Dec. 15, 2018, and the quarterly and other interim periods in those years, the FASB said. Private companies have until their fiscal years that start after Dec. 15, 2019, before applying the changes to annual reports. Private companies can wait until their fiscal years that start after Dec. 15, 2020, before they apply the changes to their reporting periods of less than a year. The accounting board also said the amended guidance can be applied before it becomes effective, but businesses are not permitted to use the guidance in ASU No. 2018-07 before they have implemented ASC 606.

The FASB said it issued ASU No. 2018-07 to simplify a long-standing source of frustration for companies that offer stock awards and have to follow different accounting models based on whether the recipient of the award is an employee or a contractor.

Businesses have typically followed the guidance in FASB ASC 718 for stock payments to employees. But shares used to pay nonemployees, such as contractors or consultants, have been accounted for according to Subtopic 505-50, formerly Emerging Issues Task Force (EITF) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

In each case, the stock awards have to be measured at their fair value, but the two pieces of guidance differ with regard to the measurement’s timing. For nonemployees, the measurement date is determined at the earlier of the date at which the commitment for performance is complete or the date at which the counterparty’s performance is complete. This requires judgment, and can lead to inconsistencies in financial reporting.

“It just takes a lot of attention by the preparers if you have awards to nonemployees, especially if you don’t do them on a big grant, and do it on a one-by-one basis. It requires the preparer to really go through and consider the measurement date for each reward each reporting period, and if they’re not tracking by software, it’s a very manual process,” an accounting firm partner Fred Frank said.

For companies used to figuring out how to measure stock awards for employees, “it kind of blows their mind that they have a whole other model to consider,” Frank said.

The update to U.S. generally accepted accounting principles (GAAP) is based on the FASB’s March 2017 Proposed ASU No. 2017-220, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.

EITF Issue No. 96-18 was published in 1996, and the different measurement guidance was selected for nonemployees because of the freedom independent contractors and consultants have to move from company to company. At the time the stock market was in the midst of what was, to that point, the longest bull run in history, and stock awards were being treated as a de facto currency. In theory, independent contractors could watch stock price movements to determine where to work. The dot-com bubble burst in 2000, and stocks fell into another deep bear market during the global financial crisis of 2008. While a new bull market was underway by 2009, the FASB now believes the assumptions behind EITF Issue No. 96-18 are overstated, given that, in the board’s view, full-time employees have the freedom to move from job to job.

With the amended guidance from ASU No. 2018-07, nonemployee share-based payments are measured with an estimate of the fair value of the equity the business is obligated to issue at the grant date. The grant date is the date the business and the stock award recipient agree to the terms of the award. Compensation would be recognized in the same period and in the same manner as if the company had paid cash for goods or services instead of stock, the FASB said.

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