FASB Votes to Finalize ASU on Improving the Accounting for Share-Based Payment Arrangements With Nonemployees
At its meeting on December 13, 2017, the FASB discussed feedback on its proposed Accounting Standards Update (ASU)1 on improving the accounting for share-based payment arrangements with nonemployees. The Board completed its redeliberations of certain issues identified in the comment letters received and authorized the staff to draft a final ASU.
Background and Decisions
On March 7, 2017, the FASB issued a proposed ASU that would simplify the accounting for share-based payments granted to nonemployees for goods and services. The amendments in the proposed ASU would align most of the accounting for share-based payment transactions between nonemployees and employees by expanding the scope of ASC 7182 to include all share-based payment arrangements related to acquiring goods and services from nonemployees.
See Deloitte’s March 10, 2017, Heads Up for key provisions of the proposed ASU. The Board reaffirmed the proposed amendments except as described below.
The proposed ASU would have required the use of contractual term (rather than expected term) as an input for measurement of nonemployee stock options and similar instruments. Because there may be circumstances in which nonemployee awards have the same transferability restrictions typically found in employee awards, the expected term of nonemployee awards may be shorter than their contractual term. Therefore, the Board decided that rather than require the use of the contractual term, it would establish a rebuttable presumption to use the contractual term as an input for measuring nonemployee stock options and similar instruments. That is, an entity could either default to using the contractual term or use the expected term if it has sufficient evidence to support the estimate. An entity would make this determination on an award-by-award basis.
Under the proposed ASU, an entity would be required to measure all of its unsettled (vested and unvested awards yet to be exercised or otherwise settled) nonemployee equity-classified share-based payment awards at their grant-date fair-value-based measure upon adoption on a modified retrospective basis. Because it may be difficult for some entities to determine the grant-date fair-value-based measure of unsettled nonemployee awards that may have been issued several years ago, the Board decided that for all unsettled awards for which a measurement date has not been previously established, an entity should instead use the fair-value-based measure determined as of the adoption date. The Board also decided that an entity should not be required to adjust the basis of assets that include nonemployee share-based payment costs as part of its cumulative-effect adjustment upon adoption.
Potential Future Clarification in ASC 606
The proposed ASU would amend the guidance in ASC 6063 on consideration payable to a customer to include equity instruments granted in conjunction with selling goods or services, and thus exclude share-based payments issued as sales incentives to customers from the scope of ASC 718. While the proposed amendments to ASC 606 would address how to account for such consideration, that guidance does not address the measurement of share-based payments paid to a customer. The Board noted that ASC 606 provides guidance on noncash consideration that could be applied by analogy; however, that guidance currently only applies to noncash consideration received from a customer. The Board decided that it will consider this issue as part of a technical corrections and improvements project.
For public business entities, the final ASU will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods. For all other entities, the ASU will be effective for annual reporting periods beginning after December 15, 2019, and for interim periods within annual reporting periods beginning after December 15, 2020. All entities may early adopt the final ASU if the entity has also adopted ASC 606.
The FASB expects to issue a final ASU in the first quarter of 2018.