Accounting Clarified for Share-Based Payments to Customers
In June 2018, FASB updated the guidance for share-based payments and aligned the accounting treatment of employee and nonemployee transactions. The standard, Accounting Standards Update (ASU) 2018-07, also required share-based payments awarded to a customer for selling goods or services to be accounted under Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. However, ASC 606 provides guidance on presentation but not on measurement. This lack of measurement guidance could have resulted in diversity in practice. This is not a pervasive issue for all entities, but for those entities that have these transactions, the effect can be material.
FASB has now issued ASU 2019-08, which requires entities to measure and classify share-based payments to a customer in accordance with the guidance in ASC 718, Compensation—Stock Compensation. The amount that would be recorded as a reduction in revenue would be measured based on the grant-date fair value of the share-based payment in accordance with Topic 718. The grant date is the date at which a supplier and customer reach a mutual understanding of the award’s key terms and conditions. The award’s classification and subsequent measurement would be subject to ASC 718 unless the award is modified or the grantee is no longer a customer.
An entity may adopt ASU 2019-08 early but not before it adopts ASU 2018-07. An entity may adopt these changes in the same fiscal year as ASU 2018-07 or in a fiscal year after the fiscal year that the entity adopts ASU 2018-07.
If an entity adopts ASU 2018-07 and ASU 2019-08 in the same year, the changes would be reflected in a cumulative-effect adjustment to the retained earnings opening balance at the beginning of the fiscal year in which it adopts ASU 2018-07.
If an entity adopts ASU 2019-08 after the fiscal year that it adopts ASU 2018-07, these changes would be reflected in a cumulative-effect adjustment to the retained earnings opening balance at the beginning of either:
- The fiscal year in which it adopted ASU 2018-07
- The fiscal year in which it adopts the amendments within ASU 2019-08