Summary of ASU 2018-07

Scope of changes

• Entities are required to value non-employee awards under ASC718 and when ASU 2018-07 is adopted the option will be given to select your expected term. You can choose the expected term to be calculated either using SAB 107 or Remaining Contractual Life. The option to choose the amortization method for Mark-to-market awards will remain.

• Under ASC 718-10-30-10A, entities may elect to use the contractual term or the midpoint as the expected term when estimating the fair value of non-employee awards.

• Additionally, under ASC 718-10-25-2C, the guidance states that entities are required to recognize compensation cost for non-employee awards as if they had been paid in cash. As such, entities may still elect to apply a different amortization method to non-employee awards.

All entities that have historically issued or are currently issuing share-based compensation to non-employees will be affected by the update.

Public entities must adopt the new standard in their fiscal year beginning after December 15, 2018. All other entities must adopt the new standard in their fiscal year beginning after December 15, 2019. Companies may early adopt the new standard but are required to adopt ASC Topic 606 alongside their adoption of ASU 2018-07. (The earliest any entity was permitted to adopt ASC Topic 606 was its annual reporting period beginning after December 15, 2016.)

For entities that have recorded historical expenses for non-employee awards, these awards will need to be revalued on the date of adoption, and a cumulative adjustment may need to be recorded. If the total expense for an award as of the adoption date differs from the amount previously recorded for the award at the end of the company’s last fiscal period, the difference is recorded as a cumulative adjustment to retained earnings.

To avoid the need for a cumulative adjustment, companies can use the end of the fiscal year as the adoption date for the award. This approach will eliminate the need for a cumulative adjustment because the total expense as of the adoption date will match the total expense previously recorded. Companies will also need to disclose in their financial statements the nature and reason for the change in accounting principle, as well as any quantitative information regarding the cumulative adjustment's effect on retained earnings and other equity components.

Reflecting the date in Carta

When creating a New Scenario in Financial Reporting, you can enter the company’s ASU 2018-07 adoption date. The report will use this date as the last date to remeasure existing non-employee awards. The fair value calculated on this date will apply to all subsequent tranches.

You can verify this change on the Option Values tab of the detailed report. If there are remaining unvested shares for non-employee awards, you will see a valuation date corresponding to the adoption date. The quantity of shares displayed will equal the total unvested shares as of that date.

How are awards outstanding at adoption impacted?

For outstanding non-employee awards, only unvested shares will be impacted by the adoption of ASU 2018-07.

For any unvested shares the award will be measured on the adoption date.

The fair value calculated on that date will be used for all unvested tranches. Non-employee awards will continue to be expensed using the amortization method chosen for “Mark-to-Market” awards.

How are awards issued after adoption impacted?

Non-employee awards issued after the adoption date will be treated the same as employee awards.

The fair value will be measured on the grant date and that will be the fair value used for the life of the award. Awards issued to non-employees after the adoption date will continue to be expensed using the amortization method chosen for “Mark-to-Market” awards.