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On Tuesday, I blogged about the FASB’s decision to expand the scope of ASC 718 to cover awards issued to nonemployees, which will generally align the accounting treatment of these awards with that of awards issued to employees. Today I take a look at the effective date and transitional provisions of the forthcoming ASU.
If your company grants awards to consultants, contractors, and the like, you may be pretty excited about this ASU. But hold on there, cowboy. First, you can’t adopt the ASU until it is issued. As I noted on Tuesday, the FASB expects to issue the ASU in Q1 of this year (i.e. March 31, give or take a week). Normally the FASB likes to issue these things while I am on vacation, but I don’t have any vacations planned for the end of March, which makes the exact timing a little harder to predict.
Once the ASU is issued, public companies will be required to adopt it by their first fiscal year beginning after December 15, 2018. Private companies get an extra year to adopt it for annual periods and an extra two years for interim periods. [This extra time afforded to private companies is a standard FASB policy and the staff and board remains steadfastly committed to it, even if the new standard makes things easier—something Russ Golden, the chair of the FASB, has expressed a combination of frustration and bemusement about in all of the FASB meetings I’ve listened to of late. I agree with Russ on this (I am actually on a first-name basis with Russ—I knew him before he was famous); if everyone is going to want to adopt the ASU early anyway, why make the effective date more complicated than it needs to be? It just makes for longer blog posts,]
Early adoption is permitted, but not before companies have adopted ASC 606, which is the FASB’s new standard on revenue recognition. Public companies are required to adopt ASC 606 in their first fiscal period beginning after December 15, 2017. For calendar-year companies (which will have to adopt ASC 606 as of January 1, 2018), this condition isn’t likely to impact their decision to adopt the ASU. But because ASC 606 represents a sea change in how revenue is recognized, non-calendar-year companies may wait until their next fiscal year begins to adopt it, which will force them to wait to adopt the ASU.
Well, for the most part, nothing. Mainly the FASB was concerned about situations in which companies issue stock to customers (e.g., as a reward or inducement), which will be accounted for under ASC 606. I’m not entirely clear on why this practice has to impact when companies adopt the nonemployee award ASU, but FASB clearly thought it was important.
The meeting notes include only a brief statement of the transition procedures, so we don’t know all the details yet. But it sounds like companies will simply fix the expense for nonemployee awards at the fair value on the date they adopt the ASU and expense the remaining portion of the award at that value. Easy peasy: no retrospective restatement and no cumulative adjustments.
Thanks to Ken Stoler of PwC for providing context on ASC 606 and helping sort through the FASB’s explanation of how the transition will work.
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