By now you may have heard that FASB announced the issuance of ASU 2018-07: Simplifications to Accounting for Nonemployee Share-Based Payments on June 20, 2018. If FASB announcements give you existential angst and you’re looking for the bottom line, Shareworks Product Manager Erin Herlihy has got your back! Let’s see what she has to say.
Hey Erin! What’s this ASU all about?
Historically, grants issued to non-employee consultants were not covered by ASC 718. Grants to this group (not to be confused with non-employee board members, who are treated as employees for accounting purposes) have been covered under ASC 505-50 (Equity Based Payments to Non-Employees) and required mark-to-market accounting through vest. The periodic revaluation of these grants results in an additional step in an already busy period-end process.
I thought this happened a long time ago?
While this has sure been in the works – and highly anticipated! – for quite some time, the simplification is only now being issued. The change is effective for fiscal years beginning after December 15, 2018 for public companies, and for fiscal years beginning after December 15, 2019 for all other companies. Early adoption is allowed but must not occur prior to the adoption of Topic 606 (Revenue from Contracts with Customers).
Does this mean we don’t have to worry about non-employees anymore?
Not so fast. US companies issuing options to non-employees must continue using a separate Expected Term assumption for this population if using the Black-Scholes pricing model. Furthermore, while companies will no longer need to revalue their grants after transition, upon adoption for US GAAP purposes, non-employees still require special treatment under IFRS.
Transition? This is going to be painful, isn’t it?
The ASU requires a final revaluation of all outstanding liability-classified shares and all unvested equity-classified shares as calculated on the adoption date. A one-time cumulative adjustment must be taken and no further revaluations will be required.
So what does this mean for Shareworks clients?
Good news! For Shareworks Financial Reporting clients, it’s business as usual. At the time of transition, for the required tranches, you would follow the normal revaluation process on your adoption date. This will calculate your final fair value and cumulative adjustment (on the expense report) as mentioned above. Going forward, you would no longer require “tranche-level” valuations for your non-employee awards. If you have any questions, reach out to your Relationship Manager!
Sweet! Thanks Erin. Just one more thing. Why does FASB spell it “nonemployee”?
Accountants are known for many things. Spelling isn’t one of them.
For more information on ASU, visit fasb.org.