Accounting for Equity Issued to Customers

It’s a slow news day here at the NASPP, so for today’s blog entry, I cover a topic that has, at best, only a tenuous connection to stock compensation: accounting for stock and other equity-based arrangements issued to customers.

Wait, What?

The idea here is that a company offers its customers stock or other equity arrangements as an incentive to buy its product/service. The stock might be offered through a customer loyalty program (sort of like frequent flyer miles, but with stock instead) or might be a one-off promotion (e.g., “buy now and we’ll throw in ten shares of our stock at no extra cost”). Think about some of the hot IPOs on the horizon for this year—if you could have gotten some of their stock or an option to buy their stock just for using their product/service, you might have been pretty motivated to do so.

What Does This Have to Do With Stock Compensation?

Nothing, really. Customers aren’t employees or even contractors; they aren’t providing a service to the companies they buy things from. So why am I blogging about this? Three reasons:

1. The FASB has proposed an update to ASC 718 to address some uncertainties in how these transactions should be accounted for and anything ASC 718-related seems like fair game for the NASPP Blog.
2. Even though this doesn’t have anything to do with compensation, it wouldn’t surprise me in the least if the companies that offer these arrangements look to their stock plan administrator to help with tracking them because, hey, you track all of the other stock (especially if you work for a private company, which are the companies that most often offer these arrangements).
3. I didn’t have any other bright ideas for today’s blog entry.

How Do Companies Account for Stock Issued to Customers and What’s Changing About This?

Companies that have adopted ASU 2018-07 (the ASU that expanded ASC 718 to cover awards issued to nonemployees) account for stock issued to customers under ASC 606 (which covers revenue recognition). That’s why companies couldn’t adopt ASU 2018-07 until they had adopted ASC 606.

Under ASC 606, the stock issued to customers is considered a reduction in revenue: the amount of revenue recorded for customers’ purchases is reduced by the value of the stock issued to them. The current uncertainties lie in how the value of the stock should be measured. Some companies have been using the measurement guidance in ASC 718 to determine the value (which requires measurement at grant) while others use the measurement guidance in ASC 606 (which requires measurement at contract inception).

The proposed ASU would stipulate that the measurement guidance in ASC 718 should be used. Thus, the amount of the reduction to revenue would be based on the grant date fair value of the arrangement under which the stock is issued. The grant date is the date that the company and the customer have a mutual understanding of the key terms of the arrangement.

Got Something to Say About This? Tell the FASB.

The FASB is soliciting comments on the proposed update through April 18, 2019.

Thanks to Bruce Brumberg of myStockOptions.com for bringing this development to my attention.

- Barbara

A note about the image: Imagine the squirrels are customers and the nuts are a metaphorical representation of shares of stock. An image that has, at best, a tenuous connection to the topic seems appropriate for a topic that has a tenuous connection to stock compensation. Besides, it was this cute picture of squirrels or some boring photo of the word “GAAP” or “accounting” spelled out in blocks. You’re welcome.