Project Update

Nonemployee Share-Based Payment Accounting Improvements

Last updated on December 20, 2017. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)


The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective
*Decisions Reached at Last Meeting
*Tentative Board Decisions Reached to Date
Due Process Documents
*Next Steps
*Board/Other Public Meeting Dates
Background Information
*Contact Information

Project Objective

The objective of the project is to reduce cost and complexity and improve the accounting for nonemployee share-based payment awards issued by public and private companies.

*Decisions Reached at Last Meeting (December 13, 2017)

Tentative Board Decisions

The Board discussed feedback received on the proposed Accounting Standards Update, Compensation—Stock Compensation (Topic 718):  Improvements to Nonemployee Share-Based Payment Accounting. The Board decided to:
  1. Retain the requirement to measure nonemployee share-based payment transactions by estimating the fair value of the equity instruments that an entity is obligated to issue.
  2. Include a rebuttable presumption that the contractual term would be an input to the option-pricing model for nonemployee share-based payment transactions unless an entity can support the use of an expected term. Use of an expected term would be allowed on an award-by-award basis.
  3. Require an entity, at transition, to measure unsettled nonemployee awards at fair value as of the adoption date. This requirement would not apply to vested equity-classified awards.
  4. Not permit an entity, at transition, to retrospectively adjust the basis of assets that include nonemployee share-based payment costs.
  5. Address a technical improvement to Topic 606, Revenue from Contracts with Customers, as part of the Codification Improvements project.
Effective Date

The Board decided that the amendments in the final Accounting Standards Update will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For nonpublic entities, the Board decided that the amendments in the final Update will be effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.
 
Analysis of Costs and Benefits
 
The Board concluded that it has received sufficient information and analysis to make an informed decision on the issues presented and that the expected benefits of the amendments justify the expected costs.

*Tentative Board Decisions Reached to Date (as of December 13, 2017)

A list of tentative Board decisions reached to date can be found here.

Due Process Documents

On March 7, 2017, the FASB issued Proposed Accounting Standards Update, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The due date for comment letters was June 5, 2017.

*Next Steps

The Board directed the staff to draft a final Accounting Standards Update for a vote by written ballot.

*Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

The following are links to the minutes for each meeting.
 
*December 13, 2017 Board Meeting—The Board discussed feedback received on the proposed Accounting Standards Update.
November 30, 2016 Board Meeting—The Board discussed comments received from external reviewers on the draft of the proposed Update. The Board also discussed a sweep issue and other due process items.
June 15, 2016 Board Meeting—The Board discussed disclosure, transition, and disclosure transition guidance for the decisions made at the May 4, 2016 meeting.
May 4, 2016 Board Meeting—The Board continued deliberations, specifically discussing questions regarding alternatives presented during the last Board meeting.
December 16, 2015 Board Meeting—The Board added the Nonemployee Share-Based Payment project to the technical agenda.

Background Information

The project for nonemployee share-based payments began as part of the simplification effort focused on making improvements to the existing model for share-based payments to employees in Topic 718, Compensation—Stock Compensation. Stakeholders suggested improvements to the nonemployee share-based payments model through:
  1. The recent PIR Report on the project that lead to the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment, included information about the nonemployee model
  2. The Private Company Council’s (PCC) ongoing dialogue about making improvements to accounting for share-based payments; individual PCC members suggested this as an area in need of improvement
  3. Ideas submitted by FASB staff members as part of the Simplification Initiative (during outreach, stakeholders also suggested that this project would be an opportunity for meaningful simplification).
During deliberations of the overall share-based payment project, the Board determined that potential improvements to the nonemployee share-based-payment model could require substantive changes beyond those consistent with the Simplification Initiative. In addition, the research for the employee model was complete and additional substantive research was needed for the nonemployee model. Consequently, the Board designated nonemployee share-based payment as its own research project to further develop potential alternatives for improving the model when staff resources became available.

Subtopic 505-50, Equity—Equity Based Payments to Non-Employees (formerly EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”) addresses particular aspects of the accounting for nonemployee awards. Subtopic 505-50 does not address all areas of accounting for awards that are addressed by Topic 718, such as classifying the awards as equity or liability, accounting for income taxes, and detailing how to measure an award at fair value. Consequently, the U.S. Securities and Exchange Commission (SEC) generally requires that registrants analogize to Topic 718 when there is no applicable guidance in Subtopic 505-50. The accounting requirements for the particular aspects of nonemployee awards that are addressed by Subtopic 505-50 are significantly different than those for employees addressed in Topic 718.

The significant differences between the accounting for nonemployee awards and employee awards are summarized below:
 
Nonemployee Awards
(Subtopic 505-50)
Employee Awards
(Topic 718)
Scope

All share-based-payment transactions for acquiring goods and/or services that are outside the scope of Topic 718.
Scope

All share-based-payment transactions with employees, defined as individuals over whom the entity has sufficient control to establish an employee-employer relationship on the basis of common law. A nonemployee board of directors also is included within the scope, provided certain criteria are met.
Measurement Date (Equity Classified)

The earlier of the date at which a commitment for performance by the counterparty is reached or the date at which the counterparty’s performance is complete. A commitment for performance occurs when performance is probable because there is a sufficiently large disincentive for nonperformance by the counterparty. The staff understands that, in practice, the requirements for a “sufficiently large disincentive for nonperformance” are typically not met; therefore, the measurement date is generally when performance is complete.
Measurement Date (Equity Classified)

Grant Date:  Generally defined as the date at which an employer and an employee reach a mutual understanding of the key terms and conditions of a share-based-payment award. On the grant date, the employer becomes contingently obligated to issue equity instruments or transfer assets to an employee who renders the requisite service. The grant date for an award of equity instruments is the date that an employee begins to benefit from, or be adversely affected by, subsequent changes in the price of the employer’s equity shares. 
Determination of Fair Value

Transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measureable. The staff understands that, in practice, preparers typically conclude that the fair value of the equity instruments issued is more reliably measurable.
Determination of Fair Value

Required to use the fair value of the equity instruments issued.
Performance Conditions

Awards with performance conditions are valued at the lowest aggregate fair value (which can be zero) and are remeasured in the same manner until all performance conditions are resolved. The model does not consider outcome probability.
Performance Conditions

Compensation expense recognition occurs when the performance condition is probable. The performance condition is measured on the basis of when the fair value is associated with the probable outcome.
Subsequent Accounting

Generally, once performance is complete, awards are subject to other generally accepted accounting principles (GAAP) (for example, Topic 815, Derivatives and Hedging).
Subsequent Accounting

Generally, awards continue to be within the scope of Topic 718 unless modified postemployment.
Attribution of Compensation Expense

The guidance requires recognition in the same manner as if the entity issuing equity had paid cash for the goods and/or services, but does not provide more specific instruction.
Attribution of Compensation Expense

There is specific guidance on the manner of attributing the compensation to be recognized.

The basis for the differences highlighted above between Topic 718 and Subtopic 505-50—particularly on measurement date—is the view that there is a fundamental difference between employees and nonemployees regarding their relationships with an entity granting the awards. Specifically, there is a presumption that employees are more economically dependent on the company and, therefore, will complete the required service, while a nonemployee may have multiple opportunities for other compensation and may choose not to complete the service if the fair value of the award declines after the grant date.

*Contact Information

Michael Cheng
Supervising Project Manager
mkcheng@fasb.org

John Schomburger
Postgraduate Technical Assistant
jschomburger@fasb.org