On June 20, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2018-07, which simplifies accounting for nonemployee share-based payments.
The existing guidance on nonemployee share-based payments is significantly different from that for employee share-based payments. The update is intended to align the accounting for nonemployee share-based payments with the accounting for employee share-based payments, with certain limited exceptions.
ASU 2018-07 supersedes ASC 505-50, Equity-Based Payments to Non-Employees, and expands the scope of ASC 718, Compensation—Stock Compensation, to include all share-based payment arrangements related to the acquisition of goods and services.
However, it doesn’t apply to arrangements in which instruments are issued to a lender or investor in a financing transaction. It also doesn’t apply to equity instruments granted to a customer under a contract in the scope of ASC 606, Revenues from Contracts with Customers. This means the majority of the guidance in ASC 718 that’s related to employee share-based payments now applies to nonemployee share-based payments.
Following are the key provisions of ASU 2018-07.
Nonemployee share-based payments are currently measured at either the fair value of the consideration received or at the fair value of the equity instruments issued, depending on which can be more reliably measured. Under ASU 2018-07, equity-classified nonemployee share-based payments—other than those used to effectively provide financing or issued as part of a contract accounted for under Topic 606—are measured at the grant-date fair value of the equity instruments.
Currently, the measurement date for equity-classified nonemployee share-based payments is the earlier of the following dates:
- When commitment for performance by the counterparty was reached
- When the performance was completed
Under ASU 2018-07, equity-classified nonemployee share-based payments are measured on the grant date.
Nonemployee share-based payments with performance conditions are currently measured at the lowest aggregate fair value as of each reporting period. This can often result in no compensation cost being recognized until the performance conditions are met. Under ASU 2018-07, nonemployee share-based payments with performance conditions are measured based on the probable outcome of the performance conditions.
Under current authoritative literature, once performance is complete, the classification of nonemployee share-based payments generally becomes subject to guidance in other GAAP, such as ASC 815, Derivatives and Hedging. This often requires a reassessment of classification upon vesting of the award.
Under ASU 2018-07, nonemployee share-based payments generally remain subject to the requirements in ASC 718, unless the award is modified after it vests, and the nonemployee is no longer providing goods or services.
Nonpublic Entity Practical Expedients
ASC 505-50 doesn’t provide nonpublic entities the use of practical expedients for measuring nonemployee share-based payments. ASU 2018-07 extends the following practical expedients currently available in ASC 718 for employee share-based payments to nonemployee share-based payments.
Under ASC 718, when a nonpublic entity can’t practicably calculate the volatility of its share price, it calculates volatility based on the historical volatility of an appropriate industry sector index instead of the expected volatility of the entity’s share price (calculated value). ASU 2018-07 requires the calculated value practical expedient be applied consistently to both employee and nonemployee share-based payments.
Nonpublic entities are permitted under ASC 718 to measure all liability-classified employee share-based payments at intrinsic value rather than fair value. ASU 2018-07 requires the intrinsic value practical expedient be applied consistently to both employee and nonemployee liability-classified share-based payments.
Under ASC 718, nonpublic entities are allowed to estimate the expected term for employee share-based payments using a practical expedient. ASU 2018-07 requires the practical expedient for calculating expected term be applied consistently to both employee and nonemployee share-based payments.
Effective Dates and Transition
ASU 2018-07 is effective at different times based on an entity’s classification.
- Public business entities. Effective for annual periods beginning after December 15, 2018, including interim periods within those periods.
- All other entities. Effective for annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020.
Early adoption is allowed as of the beginning of an annual or interim period if financial statements haven’t been issued or made available for issuance, but not prior to the adoption of ASC 606.
The amendments must be applied to equity-classified nonemployee share-based payments for which a measurement date hasn’t been established and liability-classified nonemployee share-based payments that haven’t been settled as of the adoption date.
Entities are required to measure these nonemployee share-based payments at fair value as of the adoption date with a cumulative-effect adjustment recorded to the opening balance of retained earnings as of the beginning of the annual period of adoption.
Liability-classified nonemployee share-based payments that have been settled, equity-classified nonemployee share-based payments with established measurement dates, and assets completed as of the adoption date shouldn’t be remeasured.
Entities should disclose the following in the period of adoption:
- The nature of, and reason for, the change in accounting principle
- The cumulative effect of the change to retained earnings—or other components of equity or net assets—as of the beginning of the period of adoption
We’re Here to Help
For any questions or to better understand how this new standard may affect your business, contact your Moss Adams professional.