Adoption of ASU 2018-07 in an interim period has been saved
Adoption of ASU 2018-07 in an interim period
Financial Reporting Alert 18-10
This alert addresses the questions that have arisen about how entities that have early adopted FASB Accounting Standards Update (ASU) No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, in an interim period can determine the adoption date for the calculation of the transition adjustments. We believe that there is more than one acceptable approach to making such a determination. This alert focuses on two illustrative approaches and includes sample journal entries for each one.
On June 20, 2018, the FASB issued ASU 2018-07, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees.
For public business entities (PBEs), the amendments in ASU 2018-07 are effective for fiscal years beginning after December 15, 2018, 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. Early adoption is permitted if financial statements have not yet been issued (for PBEs) or have not yet been made available for issuance (for all other entities), but no earlier than an entity’s adoption date of ASC 606. If early adoption is elected, all amendments in the ASU that apply must be adopted in the same period. In addition, if early adoption is elected in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
ASU 2018-07 generally requires an entity to use a modified retrospective transition approach, with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year, for all (1) liability-classified nonemployee awards that have not been settled as of the adoption date and (2) equity-classified nonemployee awards for which a measurement date has not been established. In the application of a modified retrospective transition approach:
- The ASU’s transition provisions do not apply to equity-classified awards for which a measurement date was previously established under ASC 505-50 because of the existence of a performance commitment or because performance was complete.
- The ASU requires equity-classified awards (for which a measurement date has not been previously established) to be remeasured on the basis of their adoption-date fair-value-based measure.
- An entity applies the guidance on modifications of an award from liability to equity classification (i.e., the unsettled liability award as measured on the adoption date would be reclassified to equity) to determine the cumulative-effect adjustment to equity for unsettled awards that are currently classified as a liability but will be classified as equity under the ASU.
- An entity should not adjust the basis of assets that include nonemployee share-based payment costs if the assets are completed (e.g., finished goods inventory or fixed assets for which amortization has commenced).
However, if a nonpublic entity changes its measurement of nonemployee awards to calculated value instead of a fair-value-based measure, the ASU requires the entity to use a prospective approach.
Determining the Adoption Date
For entities that choose to early adopt the ASU in an interim period, questions have arisen about how to determine the adoption date for the calculation of the transition adjustments. On the basis of discussions with the FASB staff, we believe that it is acceptable to determine the adoption date as of either (1) the beginning of the fiscal year in which the entity adopts the ASU or (2) the beginning of the interim period in which the entity adopts the ASU. In addition, because the guidance may not be clear, other approaches may be acceptable. However, under any approach, any transition adjustments should be reflected as of the beginning of the fiscal year of adoption.
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