Compensation & Benefits Alert - March 2017

March 2017

Accounting Change to Nonemployee Share-Based Payment Proposed  


On March 7, 2017, the Financial Accounting Standards Board (“FASB”) issued a proposed Accounting Standards Update (“ASU”) intended to improve financial reporting for some nonemployee share-based payments, by putting it more on par with accounting for employee share-based payments.  Comments are accepted on the proposal until June 5, 2017.

The ASU proposes six amendments, four of which apply to all entities, two of which apply only to nonpublic entities.


BDO Insights

  1. The proposal will allow for the measurement of the fair value (“FV”) of the award issued to nonemployees to be at the grant date, and removes the possibility of basing the FV on the consideration received by the grantor.
  2. The proposal generally conforms the measurement date to the grant date, consistent with the accounting for employee share-based payment transactions.
  3. Expense recognition for awards with performance conditions is based on the same probability analysis as for employee awards under Topic 718, rather than the lowest aggregate value.
  4. Awards remain subject to Topic 718 after the goods or services have been rendered, rather than becoming subject to other GAAP guidance, unless subsequently modified.
  5. Nonpublic entities may use calculated volatility rather than having to estimate their own expected volatility.
  6. Nonpublic entities may make a one-time election to use intrinsic value to measure liability awards issued to nonemployees, which is then marked-to-market until settlement date based on the intrinsic value, as opposed to using Fair Value.


Discussion

Currently, Subtopic 505-50, Equity-Equity Based Payments to Non-Employees, provides the accounting treatment for share-based payments issued to nonemployees.  The proposed ASU would expand the scope of Topic 718, which deals with stock compensation, to cover payments for goods and services to nonemployees, thus, making it similar to accounting for equity compensation to employees.  This expansion of Topic 718 is intended to simplify the accounting for nonemployee awards, but does not apply to grants issued to raise capital.  The proposed amendments require that an entity would apply the requirements of Topic 718 to nonemployee awards, except for specific guidance on inputs to the option pricing model (e.g. Black-Sholes-Merton model), in that it does not change the requirement that the contractual term be used instead of expected term as an input to the option pricing model, and the timing of the amortization of the expense.

1. Overall Measurement Objective (Applies to ALL Entities)

The proposal requires that nonemployee share-based payment transactions within the scope of Topic 718 would be measured by estimating the fair value (“FV”) of the equity instrument to be issued when the goods are delivered or services rendered and all necessary conditions have been satisfied.

Current GAAP requires that nonemployee share-based payment transactions are measured at the FV of the consideration received or the FV of the equity instrument issued, whichever can be more reliably measured.

2. Measurement Date (Applies to ALL entities) 

The proposal requires that equity-classified awards to nonemployees are measured at the grant date (the date at which a grantor and grantee reach a mutual understanding of the key terms and conditions of a share-based payment award).
 
Under current guidance, the measurement date for equity-classified nonemployee share-based payment awards is the earlier of the date at which a commitment for performance by the counterparty is reached and the date at which the counterparty’s performance is complete.
 
3. Awards with Performance Conditions (Applies to ALL entities)

The proposal requires that an entity would consider the probability of satisfying the performance conditions on grants made to nonemployees, consistent with rules applicable to employee share-based payment.

The current guidance requires that nonemployee share-based payment awards with performance conditions are measured at the lowest aggregate value, which may be zero.

4. Classification Reassessment of Certain Equity Classified Awards (Applies to ALL entities)

The proposal requires that generally, the classification of equity-classified awards issued to nonemployees would continue to be subject to the requirements of Topic 718 unless modified after the necessary condition has been satisfied and the nonemployee is no longer providing goods or services.

The current guidance requires that generally, the classification of equity-classified nonemployee share-based payment awards is subject to another GAAP (e.g. Topic 815, Derivatives and Hedging) once the necessary condition has been satisfied.

5. Practical Expedient – Calculated Value (Applies to nonpublic entities ONLY) 

The proposal requires that a nonpublic entity could substitute calculated values for expected volatilities as inputs to the valuation of share options issued to nonemployees if it is not practical for the entity to estimate the expected volatility of their own share price.
 
The current guidance requires that the inputs to the valuation of equity issued to nonemployees by all entities include an estimate of the expected volatility.
 
6. Intrinsic Value (Applies to nonpublic entities ONLY)

The proposal requires that a nonpublic entity may make a one-time election to switch from measuring liability classified nonemployee awards at FV to an intrinsic value measurement. If this is chosen, these awards would be subject to re-measurement at intrinsic value until settlement.

The current guidance requires that entities are required to measure liability-classified nonemployee awards at FV.


Transition Requirements, Disclosures and Effective Dates

A cumulative effect adjustment to retained earnings as of the beginning of the annual period of adoption would be necessary to apply these proposals.

For all nonpublic entities who substitute calculated volatility for estimated volatility, the proposed amendments would be applied prospectively to all awards that are measured at FV after the effective date. The proposed amendments would be applied to only outstanding awards.

Certain disclosures would be required at transition and would include the nature of, and reason for, the change in accounting principle and, if applicable, quantitative information about the cumulative effect of the change to retained earnings.

An effective date will be determined after the comment period has ended and the FASB has reviewed all comments.
 

For more information, please contact one of the following practice leaders:
 

Joan Vines
Managing Director, Compensation & Benefits

 

Alex Lifson
Principal, STSCompensation & Benefits


 

Peter Klinger
Partner, Compensation & Benefits

 

Kristin Peters
STS GES Sr. Manager - Compensation & Benefits