What is ASC-505-50?

What is ASC 505-50?

ASC 505-50 rules require all nonpublic firms to account for non-employee equity transactions based on either the fair value of the services received or the fair value of the equity instrument issued.  

ASC 505-50 determines the measurement date as the earlier of:

  • The date that commitment to perform has been determined.  
  • The actual date that the performance has been completed.

A commitment to perform starts when a large enough disincentive is presented for not performing the service. The disincentive must be directly linked to the equity provider (company) and the counterparty performing the services.

What constitutes a disincentive for nonperformance?

To satisfy the requirement for a sufficiently large disincentive for nonperformance, the economic penalty must be specified in the agreement and be significant to the counterparty. The ability to sue for nonperformance, in and of itself, does not represent a sufficiently large disincentive to ensure that performance is probable for two reasons: 
  • Suing the other party does not necessarily result in significant damages.  
  • Damages may or may not be viewed as significant to the counterparty.

How are dates determined? 

The commitment date is usually established at the grant date. If this date has not been determined at the grant date, the equity should be measured at the date the services were completed. The service performance is considered to be complete when the other party has delivered or purchased the goods or services. The completion date is also considered the vest date, indicating the option is fully vested, because there are no other services required of the other party.

When to recognize expense?

While ASC 505-50 does not specifically indicate which period expenses should be recognized, the guidance does indicate that the expenses should be recognized in the same period as when the services were performed. The options, that are expensed at fair value, accrue over the service period (vesting period) and are re-measured every period until they are settled if the services are to be performed over a period of time. On the vesting date, a final adjustment is made to reconcile the prior expenses. Note that if the performance requirements have been met but grant has expired, the expenses are not reversed. However, if the performance requirements have not been met then the expenses are reversed.

Completion of work.

Once the counterparty’s performance has been completed, the award will no longer follow ASC 505-50 or ASC 718, but instead becomes subject to other GAAP such as ASC 480 and ASC 815. For example, if a company issues a fully vested award to a nonemployee in exchange for services, the option is no longer subject to ASC 505-50 because a fully vested award indicates that the performance has been completed.
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