At its meeting on November 14, 2018, the FASB discussed the measurement and classification of share-based payments issued as sales incentives to customers under ASC 606.¹

Background

In June 2018, the FASB issued ASU 2018-07,² which supersedes ASC 505-50 and expands the scope of ASC 718 to include share-based payment arrangements related to the acquisition of goods and services from nonemployees. The ASU also amends the guidance in ASC 606-10-32-25 on consideration payable to a customer to expand the scope of the form of consideration to include equity instruments granted in conjunction with the sale of goods or services. Accordingly, the ASU excludes share-based payments issued to a customer that are not in exchange for a distinct good or service (i.e., share-based payments issued as a sales incentive to a customer) from the scope of ASC 718 and requires that they be accounted for under ASC 606. While ASC 606 addresses how to recognize equity instruments granted as consideration payable to a customer (i.e., as a reduction of revenue), it does not provide guidance on their measurement (or measurement date). Therefore, upon adoption of the ASU, there is no guidance that addresses the measurement of share-based payments issued as sales incentives to customers.

Measurement and Classification of Share-Based Payments Issued as Sales Incentives to Customers

The Board decided to add a project to its technical agenda to address the measurement and classification of share-based payments issued as sales incentives to customers through a proposed ASU. The Board considered the following two alternative methods of addressing this issue, which were presented by the FASB staff:

• Alternative 1 — Entities would measure share-based payments issued as sales incentives to customers by applying the guidance in ASC 606 related to noncash consideration received from a customer (ASC 606-10-32-21 through 32-23). Under this alternative, entities would measure share-based payments issued as sales incentives to customers at their fair value on the contract inception date (i.e., the date at which the criteria in ASC 606-10-25-1 are met). Because ASU 2018-07 excludes these types of share-based payments from the scope of ASC 718, the balance sheet classification and subsequent measurement of the share-based payments would be subject to other applicable GAAP (e.g., ASC 480 and ASC 815).
• Alternative 2 — Entities would measure and classify share-based payments issued as sales incentives to customers by applying the guidance in ASC 718. Under this alternative, entities would measure equity-classified share-based payments issued as sales incentives to customers using a fair-value-based measure on the grant date, which would be the date at which the grantor (the entity) and the grantee (the customer) reach a mutual understanding of the key terms and conditions of the share-based payment award. The classification and measurement of the share-based payment award would be subject to ASC 718 unless the award is subsequently modified when the grantee is no longer a customer.

The Board tentatively decided on Alternative 2.

Connecting the Dots The issuance or vesting of a share-based payment award issued as a sales incentive to a customer may depend on future optional purchases by the customer. Under Alternative 1, in certain circumstances, the award may not be measured until those future purchases are made (i.e., on the respective contract inception date) and would be subject to the classification guidance in other applicable GAAP. Under Alternative 2, if classified as equity under ASC 718, the award would be measured on the grant date and would continue to be classified as equity unless the award is subsequently modified when the grantee is no longer a customer.

Transition

The Board made the following tentative decisions:

• Entities that have not yet adopted ASU 2018-07 should adopt the provisions of the proposed ASU by applying the same transition requirements as ASU 2018-07.
• Entities that have already adopted ASU 2018-07 should adopt the provisions of the proposed ASU retrospectively to all relevant prior periods beginning with their initial ASU 2018-07 adoption date, with a cumulative effect adjustment to retained earnings as of the beginning of the fiscal year in which they adopted ASU 2018-07.

In addition, the fair-value-based measure of share-based payment awards issued as sales incentives to customers should be determined on the adoption date if a grant date was established before adoption.

Next Steps

The Board instructed the FASB staff to draft a proposed ASU with a comment period of 30 days or ending on March 29, 2019, whichever is longer.

For more information about the November 14, 2018, meeting, see the meeting handout or the summary of tentative Board decisions.

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1 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

2 FASB Accounting Standards Update (ASU) No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. See Deloitte’s June 21, 2018, Heads Up for key provisions of the ASU. Also see Deloitte’s August 1, 2018, Financial Reporting Alert for additional information about adoption of the ASU in an interim period.