FASB Update on Awards to Nonemployees

On June 20, 2018, the FASB issued ASU 2018-07, which expands the scope of ASC 718 to cover awards issued to nonemployees. Here are five things you need to know about it.

1. Accounting treatment of awards to nonemployees is now aligned with awards to employees. As originally issued, ASC 718 covered only awards issued to employees. Awards to nonemployees were accounted for under ASC 505-50 (formerly ETIF 96-18), which pretty much stipulated mark-to-market accounting until awards were vested. Under ASU 2018-07, awards to nonemployees receive largely the same accounting treatment as awards to employees. For equity awards, that means a grant date measurement of expense.

2. None of this applies to outside directors. For purposes of ASC 718, outside directors are considered employees (even though they are not employees for tax purposes), so the accounting treatment of their awards has always aligned with that of awards granted to employees. Unlike a lot of my blogs of late, this blog is not about outside directors.

3. Determining the expected term of options granted to nonemployees could be a challenge. For purposes of valuing options granted to nonemployees, the ASU permits companies to use either the expected term or the contractual term. The exposure draft would have required companies to use the contractual term, so this is good news.

The bad news is that if a company grants options to a small population of nonemployees, it may not have sufficient historical data to estimate an expected term and thus, could be forced to use contractual term despite all our comment letters to the FASB about this. Dammit, writing that comment letter is about eight hours of my life that I’ll never get back (not too mention the time spent on the quick survey).

4. Get prepared to make another policy decision on forfeitures. The ASU permits companies to make a one-time policy election with respect to how forfeitures of service-based awards to nonemployees will be accounted for. Companies have the same choice that they have for employee awards: estimate forfeitures or account for them only as they occur. Companies do not have to use the same approach that they use for employee awards.

5. The treatment of performance awards to nonemployees is also changing. When nonmarket performance awards are granted to nonemployees, ASC 505-50 required expense to be recorded at the minimum payout, which was usually $0. The ASU tosses this out and requires expense for nonmarket performance awards to be recorded based on the expected payout, just as it is for awards to employees.

More on the effective date and transition next week. In the meantime, here are a few articles you can read for more information:

• FASB Expands Scope of ASC 718 to Cover Awards to Nonemployees, NASPP
• Six Things Companies with Nonemployees Need to Know Right Now!!, Aon Equity Consulting and FTI Consulting
• FASB Simplifies the Accounting for Share-Based Payment Arrangements With Nonemployees, Deloitte & Touche