A proposal issued by the Financial Accounting Standards Board (FASB) on March 7 would make the accounting for nonemployee share-based payments simpler and less costly, and improve the financial reporting of such transactions.
The proposed Accounting Standards Update (ASU) seeks to expand Topic 718, Compensation—Stock Compensation, which addresses only share-based payments for goods and services to employees.
Under the proposal, accounting for share-based payments would be similar for employees and nonemployees.
In addition, the proposed ASU would replace Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees.
Here’s a snapshot of the proposal’s provisions:
The requirements of Topic 718 would apply to nonemployee awards except for specific guidance on inputs to an option pricing model and attribution of cost (the period of time over which share-based payment awards vest and the pattern of cost recognition over that period).
The proposed amendments would stipulate that share-based payments to nonemployees within the scope of Topic 718 would need to be for goods or services purchased by the grantor for use or consumption in its own operations and not effectively issued to raise capital.
Nonemployee share-based payment transactions within the scope of Topic 718 would be measured by estimating the fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied.
Equity-classified nonemployee share-based payment awards would be measured at the grant date. The definition of that date would be amended to generally state the date at which a grantor and grantee reach a mutual understanding of the key terms and conditions of a share-based payment award.
Consistent with the accounting for employee share-based payment transactions, an entity would consider the probability of satisfying performance conditions when nonemployee share-based payment awards contain such conditions.
Generally, the classification of equity-classified nonemployee share-based payment awards would continue to be subject to the requirements of Topic 718 unless modified after the good has been delivered, the service has been rendered, any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and the nonemployee is no longer providing goods or services.
A nonpublic entity could substitute calculated values for expected volatilities as inputs to the valuation of share options and similar instruments issued to nonemployees if it is not practicable for the nonpublic entity to estimate the expected volatility of its share price.
A nonpublic entity could make a one-time election to switch from measuring liability-classified nonemployee share-based payment awards at fair value to intrinsic value. If intrinsic value is elected for liability-classified awards, such awards would be subject to remeasurement until exercise.
The proposed ASU is the result of ideas submitted to the FASB as part of its simplification initiative, the Private Company Council’s ongoing dialogue about making improvements to accounting for share-based payments, and the post-implementation review of FASB Statement No. 123(R), Share-Based Payment.
Comments on the proposal are due by June 5. The exposure draft contains instructions on how you can submit comments to the FASB.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.