Companies now have new accounting guidance to follow when accounting for share-based payments to nonemployees.
The Financial Accounting Standards board issued an Accounting Standards Update that tells companies when they are paying non-employees for goods and services in shares, or stock, they should essentially follow the same guidance that’s been in place for several years for similar payments to employees.
ASU 2018-07 revises the accounting for stock compensation in a way that is intended to make it easier and less costly for companies to comply, FASB said. Historic guidance on accounting for share-based payments to non-employees is “significantly different” from guidance on payments to employees, FASB said. The new ASU adopts the approach already contained in GAAP for payments to employees, with an important difference.
When accounting for non-employee awards, FASB says, companies will not apply longstanding guidance for employee awards regarding inputs to an option pricing model or the attribution of costs. That refers to the period of time over which share-based payment awards vest and the pattern of cost recognition over that period. The ASU also specifies companies should not use the guidance to try to account for share-based payments that are used to essentially provide financing to the issuer, nor should the guidance be applied for the sale of goods and services where the new standard on revenue recognition should apply.
“Stakeholders recommended that the FASB improve the accounting for nonemployee share-based payments to reduce cost and complexity to apply the guidance, while improving the financial reporting for these transactions,” said Russ Golden, FASB chairman, in a statement. “This standard will make it easier for companies to account for the share-based payments they provide to service providers, suppliers, and other people that are not employees.”
According to FASB, companies have asked for a change to the accounting in this area for some time via various avenues, including in response to the board’s initiative to simplify numerous areas of GAAP, in dialogue with the board’s Private Company Council, and through the board’s 2014 post-implementation review of the current requirements for share-based payments to employees.
That review came roughly a decade after the board adopted Financial Accounting Statement No. 123, the historic and highly controversial standard that first established a requirement for companies to reflect an expense in the income statement for the issuance of stock compensation.