No.

2017-11
9 March 2017

To the Point
FASB proposed guidance

FASB proposes simplifying the

accounting for share-based
payments to nonemployees

The proposal would

What you need to know
expand the scope of The FASB proposed aligning the accounting for share-based payments to
nonemployees with that for employees, with certain exceptions.
ASC 718 to include
Under the proposal, the measurement and classification requirements for employee
nonemployee share- awards in ASC 718 would also apply to most nonemployee awards.
based payments. The cost of nonemployee awards would continue to be recognized in the same period
and in the same manner as if the entity had paid cash for the goods and/or services.
Comments are due by 5 June 2017.

Overview
The Financial Accounting Standards Board (FASB or Board) proposed simplifying the accounting
for share-based payments to nonemployees by aligning it with the accounting for share-based
payments to employees, with certain exceptions. The proposal would expand the scope of
Accounting Standards Codification (ASC) 718 1 to include share-based payments made to
nonemployees in exchange for goods and/or services used or consumed in an entitys own
operations, but it would retain the nonemployee cost attribution guidance currently in
ASC 505-50 2 by moving it into ASC 718.
The FASB launched the project in response to comments it received from the Financial
Accounting Foundations post-implementation review of Statement No. 123 (revised 2004),
Share-Based Payment (Statement 123(R)). At the time, stakeholders suggested improvements
to the accounting models for share-based payments to employees and nonemployees. Last year,
the FASB issued Accounting Standards Update (ASU) 2016-09 3 to simplify some aspects of
the accounting for employee awards.
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Key considerations
Expanding the scope of ASC 718
The proposal would expand the scope of ASC 718 so that todays measurement guidance for
employee awards also would apply to nonemployee awards. Under ASC 718, the measurement
date for awards to employees is generally the grant date, but if an employee award is classified
as a liability, the measurement date is the settlement date. That differs significantly from
todays guidance for nonemployee awards, which requires measurement on the earlier of
(1) the performance commitment 4 date or (2) the date at which the nonemployees
performance is complete.

Todays measurement guidance for nonemployee awards would be eliminated under the
proposal. However, nonemployee awards would be measured using the contractual term
rather than the expected term, which is used to measure employee awards.

The proposal would apply only to share-based payments an entity issues to nonemployees in
exchange for goods and/or services it will use or consume in its own operations. The proposal
states that the guidance would not apply to arrangements such as the issuance of instruments
to a lender or investor that provides financing to the issuer. The Board decided to propose
this requirement to address concerns that arrangements could be structured to produce a
desired classification of the instruments as either debt or equity. The guidance would also not
apply to transactions involving equity instruments granted in conjunction with selling goods or
services to customers as part of a contract accounted for under ASC 606, Revenue from
Contracts with Customers.

The proposal would not change todays cost attribution guidance for nonemployee awards,
but would move it from ASC 505-50 to ASC 718. That guidance requires companies to
recognize compensation cost for nonemployee awards in the same period and in the same
manner (i.e., capitalize or expense) as if they had paid cash for the goods or services. The
FASB decided not to align it with the guidance for employee awards because the Board did not
want to change current practice by prescribing a cost recognition pattern. However, an entity
would consider the probability of any performance conditions in nonemployee awards being
satisfied, as it does with employee awards.

Companies would apply this aspect of the proposal to outstanding nonemployee awards as
of the date of adoption using a modified retrospective transition method, with a cumulative
effect adjustment to retained earnings. The proposed amendments would be applied only to
outstanding awards.

How we see it
Under the proposal, the cost for nonemployee awards would be less volatile than under
current US GAAP because the measurement date would generally occur earlier.

While the proposal would align the measurement date for similar nonemployee and
employee awards, there still could be differences in the measurement of the amount
and the timing of cost recognition.

Post-vesting classification requirements

The proposal would align the post-vesting classification (i.e., debt versus equity) requirements for
employee and nonemployee awards. Today, companies are required to (1) initially assess the
classification of nonemployee awards under ASC 718 and (2) reassess classification in accordance
with other applicable US GAAP (e.g., ASC 815) 5 once performance is complete. The proposal
would eliminate todays requirement that companies reassess classification of nonemployee

2 | To the Point FASB proposes simplifying the accounting for share-based payments to nonemployees 9 March 2017
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awards upon vesting. Instead, companies would reassess classification under other applicable
US GAAP only if a nonemployee award is modified after it vests and the nonemployee is no longer
providing goods and services. This would be similar to the accounting for employee awards, which
are reassessed for classification only if they are modified after the employee terminates service.

Companies would apply this aspect of the proposal as of the adoption date to nonemployee awards
that were initially classified as equity but were reclassified as liabilities upon vesting using a
modified retrospective transition method, with a cumulative effect adjustment to retained earnings.

Nonpublic entity practical expedients

Measure awards at intrinsic value
The proposal would require nonpublic entities that make an accounting policy election to
measure liability-classified employee awards at intrinsic value also to make the same accounting
policy election for nonemployee awards.6 Nonpublic entities would be required to have a
consistent accounting policy for nonemployee and employee share-based payments. Entities
that apply this practical expedient would use a modified retrospective transition method, with
a cumulative effect adjustment to retained earnings for outstanding liability-classified awards.

Measure awards using historical volatility

The proposal would also require nonpublic entities that make an accounting policy election to
While many aspects measure options granted to employees based on a value calculated using the historical volatility of
an appropriate industry sector index (i.e., calculated value), instead of the expected volatility of
of the employee the entitys share price, to make the same accounting policy election for nonemployee awards.
Nonpublic entities would be required to have a consistent accounting policy for nonemployee and
and nonemployee employee share-based payments. Entities that apply this practical expedient would apply the
proposal prospectively to all awards that are measured at fair value after the adoption date.
share-based
payment models Disclosures and effective date
Companies would be required to disclose the nature of and reason for the change in
would be aligned, accounting principle and the cumulative effect of the change on retained earnings (or other
some differences components of equity or net assets) as of the beginning of the period of adoption.

The proposal would not add ongoing disclosure requirements.

would still exist.
The effective date will be determined after the Board considers stakeholder feedback.

Endnotes:

1
ASC 718, Compensation Stock Compensation.
2
ASC 505-50, Equity-Based Payments to Non-Employees.
3
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.
4
As described in ASC 505-50-30-12.
5
ASC 815, Derivatives and Hedging.
6
The definition of a nonpublic entity in ASC 718 for determining which entities are eligible to apply the practical
expedients would be retained.

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3 | To the Point FASB proposes simplifying the accounting for share-based payments to nonemployees 9 March 2017