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The FASB has decided to expand the scope of ASC 718 to include awards issued to nonemployees. Here are highlights of the FASB’s decision and some background on how we got here.
Currently, ASC 718 applies only to awards issued to employees and outside directors (who are considered employees for purposes of the standard, even though they are nonemployees for tax purposes). Awards issued to nonemployees are accounted for under ASC 505-50, which provides that in most cases, the measurement date of the award is the date the award vests. This means that companies have to remeasure the expense associated with awards issued to nonemployees and record expense based on those remeasurements until the awards are vested. If the stock price appreciates over the vesting schedule, the cost of the awards will increase.
In late 2014, the FASB announced a new project to consider whether the treatment of awards issued to nonemployees should be aligned with that of awards issued to employees (see “Amendments to ASC 718—Part II”). Then, in early 2017, the FASB issued an exposure draft of an accounting standards update that would do just that—by expanding the scope of ASC 718 so that the same principles would apply to both types of awards (see “FASB Exposure Draft on Nonemployee Accounting”). And in December 2017, while the rest of us were worried about what would be in the tax reform bill (see more blog entries than I could possible list here), the FASB met to consider the comments received on the exposure draft.
For the most part, the comment letters were supportive of the exposure draft and the FASB affirmed the positions taken therein. In fact, the board didn’t really spend any time on big ticket items like whether the awards issued to nonemployee should receive the same treatment as awards issued to employees—that was a foregone conclusion.
Which means that in a few months (maybe longer for some of you), you’ll be accounting for awards issued to nonemployees the same way you account for awards issued to employees. And none of us will ever again have to try to understand how to account for a change in employee status (and I won’t ever have to write a blog entry on that dreadful topic—sometimes procrastination pays off).
One controversial position in the exposure draft was that options granted to nonemployees would have to be valued at their contractual term; most of the comment letters took issue with this position. (It turns out that FASB took this position because some accounting firms told them to—then the same firms submitted comment letters opposing this position. Go figure.) The FASB decided that the final standard would include a rebuttable presumption that options granted to nonemployees should be valued using their contractual term.
The upshot here is that you can value options granted to nonemployee using expected life if you can demonstrate that the options are nontransferable or transferable only under limited circumstances and you have sufficient historical exercise data for similar options to arrive at a reasonable estimate of expected life. If your auditors insist that this data has to be for other options granted to nonemployees, this may be hard to do.
The FASB expects to issue the final ASU in Q1 of this year, which is about the same time of year that they issued ASU 2016-09 (covering tax accounting, share withholding, and forfeitures) and ASU 2017-09 (on modifications). Does that mean that this update will be ASU 2018-09—please, please, please? While I thought having an ASU 2016-09 and ASU 2017-09 was confusing, the OCD part of me really likes the idea of completing the series of three.
I will cover the effective date and transition in Thursday’s blog entry.
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