Compensation—Stock Compensation (Topic 718)

1 Compensation Stock Compensation (Topic 718) No. 2018-07 June 2018 Improvements to Nonemployee Share-Based Payment Accounting An Amendment of the FASB Accounting Standards Codification The FASB Accounting Standards Codification is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective. For additional copies of this Accounting Standards Update and information on applicable prices and discount rates contact: Order Department Financial Accounting Standards Board 401 Merritt 7 PO Box 5116 Norwalk, CT 06856-5116 Please ask for our Product Code No.

2 ASU2018-07. FINANCIAL ACCOUNTING SERIES (ISSN 0885-9051) is published monthly with the exception of May, November, and December by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. Periodicals postage paid at Norwalk, CT and at additional mailing offices. The full subscription rate is $255 per year. POSTMASTER: Send address changes to Financial Accounting Series, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. | No. 466 Copyright 2018 by Financial Accounting Foundation. All rights reserved. Content copyrighted by Financial Accounting Foundation may not be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Foundation. Financial Accounting Foundation claims no copyright in any portion hereof that constitutes a work of the United States Government.

3 An Amendment of the FASB Accounting Standards Codification No. 2018-07 June 2018 Compensation Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting Accounting Standards Update Financial Accounting Standards Board Accounting Standards Update 2018-07 Compensation Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting June 2018 CONTENTS Page Numbers Summary .. 1 4 Amendments to the FASB Accounting Standards Codification .. 5 169 Background Information and Basis for Conclusions .. 170 181 Amendments to the XBRL Taxonomy .. 182 1 Summary Why Is the FASB Issuing This Accounting Standards Update (Update)? The Board is issuing this Update as part of its Simplification Initiative. The objective of the Simplification Initiative is to maintain or improve the usefulness of the information provided to the users of financial statements while reducing cost and complexity in financial reporting.

4 The areas for simplification in this Update involve several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation Stock Compensation , to include share-based payment transactions for acquiring goods and services from nonemployees. Some of the areas for simplification apply only to nonpublic entities. The accounting for nonemployee share-based payment transactions was identified as an area for simplification through (1) outreach for the Simplification Initiative, (2) ongoing dialogue with the Private Company Council about making improvements to the accounting for share-based payments, and (3) the August 2014 Post-Implementation Review Report on FASB Statement No. 123 (revised 2004), Share-Based Payment. Who Is Affected by the Amendments in This Update? The amendments in this Update affect all entities that enter into share-based payment transactions for acquiring goods and services from nonemployees.

5 What Are the Main Provisions? The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.

6 2 How Do the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP) and Why Are They an Improvement? Subtopic 505-50, Equity Equity-Based Payments to Non-Employees, addresses aspects of the accounting for nonemployee share-based payment transactions. The accounting requirements addressed by Subtopic 505-50 are significantly different from the requirements for employee share-based payment transactions within the scope of Topic 718. Expanding the scope of Topic 718 through the amendments in this Update improves the following areas of nonemployee share-based payment accounting: Current GAAPS ummary of AmendmentsOverall Measurement Objective: Nonemployee share-based payment awards are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever can be more reliably measured. Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been Date: 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.

7 Equity-classified nonemployee share-based payment awards are measured at the grant date. The definition of the term grant date is amended to generally state the date at which a grantor and a grantee reach a mutual understanding of the key terms and conditions of a share-based payment award. Awards with Performance Conditions: Nonemployee share-based payment awards with performance conditions are measured at the lowest aggregate fair value. Consistent with the accounting for employee share-based payment awards, an entity considers the probability of satisfying performance conditions when nonemployee share- 3 Current GAAPS ummary of Amendmentsbased payment awards contain such conditions. Classification Reassessment of Certain Equity-Classified Awards: Generally, the classification of equity-classified nonemployee share-based payment awards is subject to other GAAP (for example, Topic 815, Derivatives and Hedging) once the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied.

8 This often results in the need to reassess the classification of such awards. Generally, the classification of equity-classified nonemployee share-based payment awards will continue to be subject to the requirements of Topic 718 unless modified after the good has been delivered, the service has been rendered, any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and the nonemployee is no longer providing goods or services. This eliminates the requirement to reassess classification of such awards upon vesting. Nonpublic Entity-Specific AmendmentsCurrent GAAPS ummary of AmendmentsCalculated Value: Inputs to the valuation of equity share options and similar instruments issued to nonemployees include an estimate of the expected volatility. Historical volatility of an appropriate industry-sector index is used by nonpublic entities for expected volatilities as inputs to the valuation of share options and similar instruments issued to nonemployees when it is not practicable for the nonpublic entity to estimate the expected volatility of its share Value: Entities are required to measure liability-classified nonemployee share-based payment awards at fair value.

9 A nonpublic entity can make a one-time election to switch from measuring liability-classified nonemployee share-based payment awards at fair value to intrinsic value. Regardless of the election, liability-classified awards would be subject to remeasurement until When Will the Amendments Be Effective and What Are the Transition Requirements? The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity s adoption date of Topic 606. An entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.

10 Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date. The entity must not remeasure assets that are completed. For example, finished goods inventory or equipment that has begun amortization should not be remeasured upon transition. Disclosures required at transition include the nature of and reason for the change in accounting principle and, if applicable, quantitative information about the cumulative effect of the change on retained earnings or other components of equity. 5 Amendments to the FASB Accounting Standards Codification Introduction 1. The Accounting Standards Codification is amended as described in paragraphs 2 73. In some cases, to put the change in context, not only are the amended paragraphs shown but also the preceding and following paragraphs. Terms from the Master Glossary are in bold type.