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Why Is the FASB Issuing This Accounting Standards Update (Update)?
In June 2018, the Board issued Accounting Standards Update No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, as part of its Simplification Initiative. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to financial statement users. The amendments in that Update expanded the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and in doing so superseded guidance in Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees.
In Update 2018-07, paragraphs 606-10-32-25, 718-10-25-2C (formerly paragraph 505-50-25-4), and 718-10-15-5 were amended to require that share-based payment awards granted to a customer in conjunction with selling goods or services be accounted for under Topic 606, Revenue from Contracts with Customers. While Topic 606 provides guidance on presentation (as a reduction of the transaction price and, therefore, of revenue), it does not provide guidance on measuring share-based payment awards granted to a customer. The Board received feedback that the lack of guidance for such transactions could lead to diversity in practice because entities may apply either noncash consideration guidance under Topic 606 (measure at contract inception) or Topic 718 (measure at grant date).
The Board has an ongoing project on its agenda for improving the Codification or correcting its unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities. The amendments in this Update are similar to those items. However, the Board decided to issue a separate Update for improvements to the amendments in Update 2018-07 to increase stakeholder awareness of those amendments and to expedite the improvements process.
Who Is Affected by the Amendments in This Update?
The amendments in this Update affect all entities within the scope of Topic 606 that issue share-based payments to customers.
What Are the Main Provisions?
The amendments in this Update require that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to be measured on the basis of the grant-date fair value of the share-based payment award in accordance with Topic 718. The grant date is the date at which a grantor (supplier) and a grantee (customer) reach a mutual understanding of the key terms and conditions of a share-based payment award. The classification and subsequent measurement of the award are subject to the guidance in Topic 718 unless the share-based payment award is subsequently modified and the grantee is no longer a customer.
How Do the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP) and Why Are They an Improvement?
After the effective date of the amendments in Update 2018-07, the Codification would have no longer provided explicit guidance on when to measure share-based payment awards granted to a customer. Stakeholders indicated that there is diversity in practice with the approach to measuring share-based payment awards granted to a customer by those entities that have early adopted the amendments in Update 2018-07. Stakeholders also indicated that further diversity is expected to arise after those amendments are effective. Stakeholders said that entities are analogizing either to noncash consideration guidance in Topic 606 or to Topic 718.
The amendments in this Update require that an entity apply the guidance in Topic 718 to measure and classify share-based payment awards granted to a customer. The amount recorded as a reduction in the transaction price should be based on the grant-date fair value of the share-based payment award.
When Will the Amendments Be Effective and What Are the Transition Requirements?
For entities that have not yet adopted the amendments in Update 2018-07, the amendments in this Update 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 the amendments in Update 2018-07, the amendments in this Update 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 this Update, but not before it adopts the amendments in Update 2018-07.
An entity may adopt the amendments in this Update either in the same fiscal year that it adopts the amendments in Update 2018-07 (see (1) below) or in a fiscal year after the fiscal year that the entity adopts the amendments in Update 2018-07 (see (2) below) as follows:
  1. If an entity adopts the amendments in this Update in the same fiscal year that it adopts the amendments in Update 2018-07, the entity should apply the amendments in this Update through a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of the fiscal year in which it adopted the amendments in Update 2018-07.
  2. If an entity adopts the amendments in this Update in a fiscal year after the fiscal year that the entity adopts the amendments in Update 2018-07, the entity should apply the amendments in this Update through a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of either:
    1. The fiscal year in which it adopted the amendments in Update 2018-07
    2. The fiscal year in which it adopts the amendments in this Update.
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