Codification Improvements—Share-Based Consideration
Payable to a Customer

Accounting Standards Update 2019-08—Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer

 

Overview


On November 11, 2019, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update to address potential diversity in practice in measuring share-based payment awards granted to customers.  The amendments in Update 2019-08 require share-based payment awards granted to customers to be measured and classified (on the balance sheet) in accordance with Topic 718 on stock compensation.

In Update 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, Topic 606, Revenue from Contracts with Customers, and Topic 718 were amended to require that share-based payment awards granted to a customer in conjunction with selling goods or services be accounted for under Topic 606. While Topic 606 provides guidance on presentation (as a reduction of the transaction price and, therefore, of revenue), it does not provide guidance on measuring or classifying (on the balance sheet) share-based payment awards granted to a customer. The Board received feedback from stakeholders that the lack of guidance for such transactions could lead to diversity in practice.
 

How Do the Amendments Improve Current Generally Accepted Accounting Principles (GAAP)?


After the effective date of the amendments in Update 2018-07, the Codification would have no longer provided explicit guidance on when to measure share-based payment awards granted to a customer. Stakeholders indicated that there was diversity in practice with the approach to measuring share-based payment awards granted to a customer by those entities that had early adopted the amendments in Update 2018-07, with entities applying either noncash consideration guidance in Topic 606 or guidance in Topic 718. Stakeholders also indicated that further diversity was expected to arise after those amendments were effective.

The amendments in this Update address the diversity in practice highlighted by stakeholders by requiring that an entity apply the guidance in Topic 718 to measure and classify share-based payment awards granted to a customer. The amount recorded as a reduction in the transaction price should be based on the grant-date fair value of the share-based payment award.

Measuring and classifying share-based payments to customers under Topic 718 provides the following improvements:
  1. Fewer measurement dates for the instruments
  2. Few instances of classifying the instruments as liabilities
  3. More consistent accounting with share-based payments made to other nonemployees.
The Board has an ongoing project on its agenda for improving the Codification or correcting its unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities. The amendments in this Update are similar to those items. However, the Board decided to issue a separate Update for improvements to the amendments in Update 2018-07 to increase stakeholder awareness of those amendments and to expedite the improvements process.
 

Effective Date and Transition
 

For entities that have not yet adopted the amendments in Update 2018-07, the amendments in this Update are effective for (1) public business entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and (2) other than public business entities in fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

For entities that have adopted the amendments in Update 2018-07, the amendments in this Update are effective in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

An entity may early adopt the amendments in this Update, but not before it adopts the amendments in Update 2018-07.

An entity may adopt the amendments in this Update either in the same fiscal year that it adopts the amendments in Update 2018-07 (see (1) below) or in a fiscal year after the fiscal year that the entity adopts the amendments in Update 2018-07 (see (2) below) as follows:
  1. If an entity adopts the amendments in this Update in the same fiscal year that it adopts the amendments in Update 2018-07, the entity should apply the amendments in this Update through a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of the fiscal year in which it adopted the amendments in Update 2018-07. 
  2. If an entity adopts the amendments in this Update in a fiscal year after the fiscal year that the entity adopts the amendments in Update 2018-07, the entity should apply the amendments in this Update through a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of either:
    1. The fiscal year in which it adopted the amendments in Update 2018-07 
    2. The fiscal year in which it adopts the amendments in this Update.
 

Additional Information

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