Perspectives

FASB simplifies the accounting for share-based payment arrangements with nonemployees 

This Heads Up discusses FASB Accounting Standards Update (ASU) No. 2018-07, "Improvements to Nonemployee Share-Based Payment Accounting," 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.

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Background

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.

Currently, share-based payment arrangements with employees are accounted for under ASC 718, while nonemployee share-based payments issued for goods and services are accounted for under ASC 505-50. ASC 505-50, before the ASU’s amendments, differs significantly from ASC 718. Differences include (but are not limited to) the guidance on (1) the determination of the measurement date (which generally is the date on which the measurement of equity-classified share-based payments becomes fixed), (2) the accounting for performance conditions, (3) the ability of a nonpublic entity to use certain practical expedients for measurement, and (4) the accounting for (including measurement and classification) share-based payments after vesting. The ASU eliminates most of the differences, as further described below.

Connecting the Dots

In the ASU’s Basis for Conclusions, the FASB discusses the issuance of the guidance in ASC 505-50, noting that the differences between the accounting for employee and nonemployee awards was originally based on “the view that there is a fundamental difference between the relationship that employees and nonemployees have with the entity granting the awards.” However, the Board concluded that awards granted to employees are economically similar to awards granted to nonemployees and that therefore two different accounting models were not justified.

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Volume 25, Issue 6 | June 21, 2018

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Heads Up newsletters, published as warranted, analyze important accounting developments, such as new FASB and IASB pronouncements or exposure drafts. Concise examples and answers to frequently asked questions assist readers in understanding and implementing the critical guidance.

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