Does your company offer stock options and other share-based payments to your independent contractors and other nonemployees? These add-ons can provide incentives for your nonemployees to work harder toward maximizing the company’s value, and can enhance compensation packages, but accounting for share based payments is complex and costly. For this reason, in June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07).

What does this mean for your business? Read on.

ASU 2018-07

The overall objective of ASU 2018-07 is to simplify the accounting for share-based payments granted to nonemployees for goods and services and reduce cost and complexity.

Who counts as a “nonemployee”?

There are individuals who can work for your company without being considered an “employee”.

This includes:

• Freelancers
• Part-time workers
• Independent Contractors
• Interns

Key changes

The following are the key changes items impacted by ASU 2018-07:

• Previously, equity-classified nonemployee awards were measured on the earlier of

1. The performance commitment date or
2. The date at which the nonemployee’s performance is complete.

The awards will now be measured on the grant date.

• Awards to nonemployees will no longer measured at the more reliable of the fair value of the goods or services received or the fair value of the equity instrument issued, but rather the award will be measured at the fair value of the equity instrument.
• On an award-by-award basis, companies can use the expected term to measure nonemployee awards or use the contractual term as the expected term.
• Nonemployee awards with performance conditions that impact the quantity or terms (exercise price) will now be measured similarly to employee share-based payments by requiring companies to consider the probability of satisfying the performance conditions to determine the fair value of the award.
• Reassessment of the classification of equity-classified nonemployee share-based payments only must be done if the award is modified after vesting and the nonemployee is no longer providing goods and services.
• Nonpublic companies must measure their liability classified nonemployee awards under the intrinsic value method if they measure liability-classified employee awards using the intrinsic method.

ASU 2018-07 is effective for public business entities for fiscal years beginning after December 31, 2018, including interim periods within that fiscal year. For non-public entities, the effective date is fiscal years beginning after December 15, 2019. Early adoption is permitted.

Need help getting started? We can help you implement ASU 2018-07. Contact us today.