How to Report Stock Compensation Paid to Nonemployees

22 Feb How to Report Stock Compensation Paid to Nonemployees

The accounting rules for reporting stock compensation have been expanded. They now include share-based payments to nonemployees for providing goods and services, under recent guidance issued by the Financial Accounting Standards Board (FASB).

Old Rules

Under existing U.S. Generally Accepted Accounting Principles (GAAP), FASB requires businesses that give stock awards to independent contractors or consultants to follow a separate standard from the one used for employee stock compensation.

Under Accounting Standards Codification (ASC) Subtopic 505-50, Equity — Equity-Based Payments to Non-Employees, the measurement date for nonemployees is determined at the earlier of the date at which:

  • The commitment for performance is complete, or
  • The counterparty’s performance is complete

This requires judgment and tracking issues that have led to inconsistencies in financial reporting, especially if nonemployees are awarded stock options on a one-by-one basis, rather than a single large grant.

FASB originally chose to apply different stock compensation guidance to nonemployees because independent contractors and consultants were perceived as having significant freedom to move from company to company. In theory, independent contractors could watch stock price movements to determine where to work.

However, FASB now believes the assumptions behind the dual standards were overstated, because full-time employees also have the freedom to move from job to job.

New Rules

In June 2018, FASB issued Accounting Standards Update (ASU) No. 2018-07, Compensation — Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting. It eliminates the separate guidance for stock compensation paid to nonemployees and aligns it with the guidance for stock compensation paid to employees.

Under the aligned guidance, all share-based compensation payments will be measured with an estimate of the fair value of the equity the business is obligated to issue at the grant date. The grant date is the date the business and the stock award recipient agree to the terms of the award. Essentially, compensation will be recognized in the same period and in the same manner as if the company had paid cash for goods or services instead of stock.

The guidance does not cover stock compensation that is used to provide financing to the company that issued the shares. It also does not include stock awards tied to a sale of goods or services as part of a contract accounted for under the new-and-improved revenue recognition standard.

Effective Dates

The updated standard is effective for public companies for fiscal years that begin after December 15, 2018. Private companies have an extra year to implement the changes for annual reports. Early adoption is generally permitted, but businesses are not allowed to follow the changes in ASU No. 2018-07 until they have implemented the new revenue recognition standard.

Contact KPM for more information.