On November 11, 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-08, Codification Improvements—Share-Based Consideration Payable to a Customer. The ASU is intended to provide guidance for measuring and classifying share-based payment awards granted to a customer in conjunction with selling goods or services.
Following are the key provisions and effective dates entities should know.
Background
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which amended Accounting Standards Codification (ASC) paragraphs 606-10-32-25 and 718-10-25-2C. The amendments in ASU 2018-07 require that share-based payment awards to a customer in conjunction with selling goods or services be accounted for under Topic 606, Revenue from Contracts with Customers.
Topic 606 provides guidance on presentation, stating that consideration payable to a customer must be presented as a reduction of revenue, unless the payment is in exchange for a distinct good or service. However, it doesn’t provide guidance on the measurement or balance sheet classification of share-based payments granted to a customer.
The FASB received feedback that the lack of guidance may lead to diversity in practice. This is because entities may choose to apply the noncash consideration guidance under Topic 606 or Topic 718, Stock Compensation, which result in two different conclusions:
- Topic 606. Measure share-based payments at contract inception.
- Topic 718. Measure share-based payments at the grant date.
To prevent diversity in accounting, the amendments in ASU 2019-08 require entities to measure and classify share-based payment awards to a customer in conjunction with selling goods or services by applying the guidance in Topic 718. The FASB selected the approach in Topic 718 because it creates symmetry between the accounting for the purchase and sale of goods or services when using share-based payment awards.
Key Provisions
Under Topic 718, share-based consideration payable to a customer is measured on the grant date—the date on which the grantor or supplier and the grantee or customer reach a mutual understanding of the key terms and conditions of a share-based payment award. The classification of a share-based payment award is subject to Topic 718, unless the award is subsequently modified and the grantee is no longer a customer.
Initial Measurement
The amendments require share-based payment awards granted by an entity in conjunction with selling goods and services to a customer be measured generally at the grant-date fair value in accordance with Topic 718.
If the number of equity instruments promised in a contract is variable due to a service or performance condition that affects the vesting of an award, an entity should estimate the number of equity instruments it will be obligated to issue to its customer at the grant date and update the estimate until the award vests in accordance with Topic 718.
When an estimate of an equity instrument’s fair value is required before the grant date—in accordance with the guidance on variable consideration in paragraph 606-10-32-7—the estimate should be based on the award’s fair value at the reporting dates that occur before the grant date.
An entity should change the transaction price for the cumulative effect of measuring the fair value at each reporting period after the initial estimate until the grant date occurs. In the period in which the grant date occurs, the entity should change the transaction price for the cumulative effect of measuring the fair value at the grant date rather than the fair value previously used at any prior reporting date.
Subsequent Measurement
Changes in the measurement of a share-based payment award to a customer are subject to the guidance in Topic 718, unless the award is subsequently modified and the grantee is no longer a customer. A subsequent change in the measurement of the award that is due to the form of consideration shouldn’t be included in the transaction price or recognized in revenue. Instead, it should be recognized elsewhere in the income statement.
Disclosures
The FASB didn’t include any new disclosures or amendments to existing disclosure requirements applicable to share-based payment awards to a customer. The FASB concluded it was clear that the grantor should evaluate the disclosure requirements in both Topic 606 and Topic 718 and no additional disclosure guidance was required.
Nonpublic Entities
Topic 718 currently allows nonpublic entities to make a policy decision to measure all liabilities incurred under share-based payment transactions at either fair value or intrinsic value.
The amendments, on the other hand, require nonpublic entities to initially and subsequently measure awards determined to be consideration payable to a customer at fair value.
Effective Dates
For entities that haven’t yet adopted ASU 2018-07, the amendments are effective as follows:
- Public business entities. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.
- 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.
For entities that have already adopted ASU 2018-07, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
Early adoption is permitted, but not before adopting ASU 2018-07.
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For more information on how these changes may affect your accounting for share-based payment awards to a customer, contact your Moss Adams professional.