By Denise Lugo
The FASB issued a new accounting standard on November 11, 2019, to provide companies with a simpler, more consistent way to account for share-based payments made to customers, an area riddled with reporting differences among companies.
Similar to issuing a cash rebate to a customer, some companies issue share-based payments to incentivize additional customer 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, the board said.
Ultimately, the newly issued standard will enable investors and other financial statement users to get better, more comparable information about those awards.
“The new standard continues our efforts to simplify and improve reporting of share-based payments—in this case, those paid to customers,” FASB Chairman Russell Golden said in a statement. “The new standard also will give financial statement users a clearer, more consistent picture of these awards.”
The guidance, issued as Accounting Standards Update (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 , takes effect for public companies’ fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Private companies would apply the changes to fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
The rules piggyback on changes the board made last year. In June 2018, the FASB expanded the scope of Topic 718, Compensation—Stock Compensation , to include share-based payments to nonemployees in exchange for goods and services. Those changes substantially aligned the accounting for share-based payments to nonemployees and employees, the FASB said. 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 accounting standard gave guidelines about the income statement classification of payments to customers (as a reduction of revenue), it 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), the board said.
To address reporting differences among companies 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.
The board said 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.
This article originally appeared in the November 12, 2019 edition of Accounting & Compliance Alert, available on Checkpoint.
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