Accounting rules for the reporting of stock compensation have recently been expanded under guidance by the Financial Accounting Standards Board (FASB). The updates now include share-based payments to non-employees for providing goods and services.
Under the current U.S. Generally Accepted Accounting Principles (GAAP), the FASB requires that businesses giving stock awards to consultants or independent contractors to follow different policies than those used for stock compensation to employees.
Accounting Standards Codification (ASC) Subtopic-505-50, Equity – Equity-based Payments to Non-employees, the date of measurement for non employees is determined before the date that the commitment for performance is complete, or earlier than the date that the counterparty’s performance is complete.
This standard requires judgment and tracking practices that have been shown to create inconsistencies in financial reporting, especially when non-employees are awarded stock options on a one-by-one basis rather than a single large grant.
The separate stock compensation guidance for non-employees that was put in place by the FASB was intended to cut back on the perception that consultants and independent contractors have significant mobility between companies, allowing independent contractors to watch stock price movements and determine where to work accordingly.
However, the FASB now believes that this perception was overstated because full-time employees have the same ability to move from job to job.
Under Accounting Standards Update (ASU) No. 2018-07, Compensation – Stock Compensation: Improvements to Non-employee Share-Based Payment Accounting, issued by the FASB in June of 2018, the separate guidances for employees and non-employees have been eliminated. The policies for employees and non-employees regarding guidance for stock compensation are now aligned.
The new guidance requires that all share-based compensation payments to be measured with an estimate of the fair value of the equity the business is obligated to issue at the date the business and the stock award recipient agree to the terms of the stock award, which is referred to as the grant date. This helps to ensure compensation is recognized in the same period and using the same system as if the company had paid cash for the services or goods rather than awarding stock.
Stock compensation that is used to provide financing to the company that issued the shares is not included in the new guidance. Stock awards tied to a sale of goods or services as terms of a contract that are accounted for under the new-and-improved revenue recognition standard are not included in the new FASB guidance.
The updated standard goes into effect for public companies for fiscal years beginning after December 15, 2018, and one year later for private companies.
Early adoption is permitted, but only once companies have implemented the new revenue and recognition standard.
We can look into your company’s stock compensation policies and discuss the implications of the new standards. Contact us at 949-860-9902 or click here, and we will contact you.