The FASB issues ASU No. 2019-08, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer, that simplifies and increases comparability of accounting for nonemployee share-based payments, specifically those made to customers.
ASU No. 2019-08
This ASU will affect companies that issue share-based payments (e.g., options or warrants) to their customers. Similar to issuing a cash rebate to a customer, issuing a share-based payment to a customer can incentivize additional purchases. The share-based payments can also serve a strategic purpose by aligning the interests of a supplier and its customer, because the customer’s additional purchases increase its investment in the supplier.
In June 2018, the FASB issued an ASU that expanded the scope of Topic 718, Compensation—Stock Compensation, to include share-based payments to nonemployees in exchange for goods and services. That ASU substantially aligned the accounting for share-based payments to nonemployees and employees. However, it required share-based payments to nonemployee customers to be accounted for under Topic 606, Revenue from Contracts with Customers, as a reduction of revenue, similar to other sales incentives (such as coupons and rebates).
While that ASU provided guidance on the income statement classification of payments to customers (as a reduction of revenue), that ASU did not specify when to measure such awards or how to classify awards on the balance sheet (for example as a liability or as equity). To address diversity in these areas, the new guidance requires companies to measure and classify (on the balance sheet) share-based payments to customers by applying the guidance in Topic 718. As a result, the amount recorded as a reduction in revenue would be measured based on the grant-date fair value of the share-based payment.
Measuring and classifying share-based payments to customers under Topic 718 provide the following improvements:
-Fewer measurement dates for the instruments;
-Fewer instances of classifying the instruments as liabilities; and
-More consistent accounting with share-based payments made to other nonemployees.
ASU No. 2019-08 is effective for entities that have not yet adopted the amendments in ASU No. 2018-07, the amendments in ASU No. 2019-08 are effective for (1) public business entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and (2) other than public business entities in fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
For entities that have adopted ASU No. 2018-07, the amendments in ASU No. 2019-08 are effective in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.
An entity may early adopt the amendments in ASU No. 2019-08, but not before it adopts the amendments in ASU No. 2018-07.
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