The recent changes in stock compensation for non-employees will reduce complexity and should also smooth volatility in recognizing associated compensation costs in the income statement. These changes were issued in June 2018 and are first effective for private companies with calendar year 2020, although early adoption is permitted.
New guidance will require that the current non-employee stock award compensation guidance in ASC Subtopic 505-50 be superseded, and accounting for both employee and non-employee stock award compensation will be covered by ASC Topic 718, the existing Codification section for employee stock award compensation.
One key carve-out relates to limiting the scope of non-employee awards accounted for under Topic 718, similar to employee awards, to those granted for goods or services used in the business operations of the company granting the awards. This means that awards granted to non-employees in the context of providing financing to the company cannot be accounted for under Topic 718. Also, certain awards granted to customers are accounted for under revenue recognition guidance.
Under the new non-employee guidance, stock awards are measured at the grant date fair value of the equity instrument. Previously, compensation cost often was recognized at the fair value as the award vested, which required adjustments to the fair value through compensation costs at various reporting dates throughout the term of vesting. In measuring compensation costs at the grant date throughout the award term, similar to employee awards, volatility to the income statement should be reduced because the fair value is generally not adjusted over the vesting period of the award as was previously the case.
For non-employee awards, a company can, but is not required to, elect to use the contractual term of the award as the estimated term in the fair value pricing model, since estimating an expected term for non-employees is more difficult than for employees. Alternatively, a private company can make an accounting policy election to use the practical expedient for expected term available for employee awards.
One reminder: Board of Director members who receive stock awards solely in their role as a Board member (rather than for performing services or providing goods as a non-employee) are considered employees for purposes of applying stock compensation guidance to those awards.
While significant conformity between employee and non-employee awards is achieved with the updated guidance, leading to simplifications in the accounting for non-employee awards, differences remain and not all non-employee awards are covered under stock compensation guidance in Topic 718. This is an invitation to learn more if your organization issues share-based awards to non-employees. A good place to start gaining familiarity is with a FASB Summary, or feel free to contact a member of ASL’s audit & accounting group.