FASB addresses share-based payments to customers

By Ken Tysiac

FASB issued new guidance Monday that is designed to simplify and increase the comparability of accounting for share-based payments made to customers.

The new standard requires companies to measure and classify (on the balance sheet) share-based payments to customers by applying the guidance in FASB ASC Topic 718, Compensation — Stock Compensation. The update affects companies that issue share-based payments such as options or warrants to their customers.

By issuing a share-based payment, a company can incentivize additional purchases. The share-based payments also can align the interest of a supplier and its customer because the customer's additional purchases increase its investment in the supplier.

In a June 2018 Accounting Standards Update (ASU), FASB expanded the scope of Topic 718 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. But the June 2018 ASU 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.

But the June 2018 ASU did not specify when to measure such awards or how to classify them on the balance sheet, for example, whether they should be classified as liabilities or equity.

The new standard addresses these issues by requiring companies to apply Topic 718 guidance to these payments. 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.

According to FASB, the new standard will result in 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.

The effective dates are available in the standard, which is posted on FASB's website.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.

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