Accounting
FASB Improves Accounting for Share-Based Payments Made to Customers
This ASU will affect companies that issue share-based payments (for example, 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.
Nov. 13, 2019
The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) that simplifies and increases comparability of accounting for nonemployee share-based payments, specifically those made to customers.
“The new standard continues our efforts to simplify and improve reporting of share-based payments—in this case, those paid to customers” said FASB Chairman Russell G. Golden. “The new standard also will give financial statement users a clearer, more consistent picture of these awards.”
This ASU will affect companies that issue share-based payments (for example, 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.
The new ASU, including its effective dates, is available at www.fasb.org.