FASB Votes to Finalize ASU on the Accounting for Share-Based Consideration Payable to a Customer
At its meeting on July 31, 2019, the FASB discussed feedback on its proposed Accounting Standards Update (ASU)1 on the accounting for share-based consideration payable to a customer. The Board completed its redeliberations of certain issues identified in the comment letters received.
Background
In June 2018, the FASB issued ASU 2018-07,2 which supersedes ASC 505-503 and expands the scope of ASC 7184 to include share-based payment arrangements related to the acquisition of goods and services from nonemployees. ASU 2018-07 also amends the guidance in ASC 606-10-32-25 on consideration payable to a customer to expand the scope of the form of consideration to include equity instruments granted in conjunction with the sale of goods or services. Accordingly, the ASU excludes share-based payments issued to a customer that are not in exchange for a distinct good or service (i.e., share-based payments issued as a sales incentive to a customer) from the scope of ASC 718 and requires that they be accounted for under ASC 606.5 While ASC 606 addresses how to recognize equity instruments granted as consideration payable to a customer (i.e., as a reduction of revenue), it does not provide guidance on their measurement (or measurement date). Therefore, upon adoption of ASU 2018-07, there is no guidance that addresses the measurement of share-based payments issued as sales incentives to customers.
On March 4, 2019, the FASB issued a proposed ASU that would clarify the accounting for share-based payments issued as share-based consideration payable to a customer under ASC 606. The proposed ASU would require that entities measure and classify share-based consideration payable to a customer by applying the guidance in ASC 718. Accordingly, under the proposed ASU, entities would measure share-based consideration payable to a customer by using a fair-value-based measure on the grant date, which would be the date on which the grantor (the entity) and the grantee (the customer) reach a mutual understanding of the key terms and conditions of the share-based payment. The resulting measurement of the share-based payment would be reflected as a reduction of revenue in accordance with the guidance in ASC 606 on consideration payable to a customer. After initial recognition, the measurement and classification of the share-based consideration payable to a customer would continue to be subject to ASC 718 unless (1) the award is subsequently modified when vested and (2) the grantee is no longer a customer.
See Deloitte’s March 5, 2019, Heads Up for key provisions of the proposed ASU.
Board Decisions
The Board reaffirmed its decision to require that entities measure and classify share-based consideration payable to a customer by applying the guidance in ASC 718, subject to the clarifications described below.
Market, Performance, Service, and Other Conditions
The Board clarified that both vesting and nonvesting conditions should be evaluated in accordance with ASC 718.
Presentation of Changes in Measurement Due to the Form of Consideration
The Board reaffirmed the requirement that changes in the fair-value-based measure after the grant date of liability-classified awards should be presented elsewhere in the income statement (rather than in revenue).
Revenue Recognition Preceding the Grant Date
The Board clarified that when a grant date has not been achieved but revenue has been recognized (because goods or services have been delivered), an entity should estimate the fair-value-based measure of share-based consideration payable to a customer.
Nonpublic Entity Election to Measure Liability-Classified Awards at Intrinsic Value
The Board clarified that the subsequent measurement of a nonpublic entity’s liability-classified share-based consideration payable to a customer should be at a fair-value-based measure even when the entity makes the intrinsic value measurement election for other liability-classified awards within the scope of ASC 718.
Issuer Also Receives Distinct Goods or Services From the Customer
The Board clarified that an entity must first assess the fair value of any distinct goods and services received from a customer when determining whether share-based consideration payable to a customer should be recognized as a reduction of the transaction price.
Transition
The Board reaffirmed the transition guidance included in the proposed ASU, which would require an entity to apply the same transition provisions as those in ASU 2018-07. If an entity has already adopted ASU 2018-07, it should adopt the provisions of the final ASU retrospectively for all relevant prior periods beginning with its initial ASU 2018-07 adoption date, with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which it adopted ASU 2018-07. However, the Board decided to include an optional practical expedient that allows entities that have already adopted ASU 2018-07 to apply the final ASU through a cumulative-effect adjustment at the beginning of the fiscal year in which the final amendments are adopted, rather than as of the adoption date of the amendments in ASU 2018-07.
Effective Date
The effective date of the final ASU will depend on whether an entity has previously adopted ASU 2018-07.
For entities that have not yet adopted ASU 2018-07, the effective date differs for public business entities (PBEs) and all other entities. For PBEs, the amendments in the final ASU are effective for fiscal years beginning after December 15, 2019, including interim periods therein. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020 (the same adoption date as that in ASU 2018-07).
For entities that have already adopted ASU 2018-07, the amendments in the final ASU are effective for fiscal years beginning after December 15, 2019, including interim periods therein.
Early adoption is permitted for all entities, but not earlier than an entity’s adoption date of ASU 2018-07.
Next Steps
Footnotes
1
FASB Proposed Accounting Standards Update, Codification Improvements — Share-Based Consideration Payable to a Customer.
2
FASB Accounting Standards Update No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. See Sections 9.1 through 9.10 of Deloitte’s A Roadmap to Accounting for Share-Based Payment Awards for key provisions of the ASU.
3
FASB Accounting Standards Codification (ASC) Subtopic 505-50, Equity-Based Payments to Non-Employees.
4
FASB Accounting Standards Codification Topic 718, Compensation — Stock Compensation.
5
FASB Accounting Standards Codification Topic 606, Revenue From Contracts With Customers.