ASC 505-50: Non-Employee Equity-Based Payments & Journal Entries Explained

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Accounting Standards Codification (ASC) 505-50, "Equity - Equity-Based Payments to Non-Employees," provides guidance on the accounting treatment for share-based payment transactions involving non-employees, such as consultants or independent contractors. This article explains the key provisions of ASC 505-50, its application, and the relevant journal entries for recognizing share-based compensation expense related to equity-based payments to non-employees.

 

Overview of ASC 505-50

ASC 505-50 establishes the accounting rules for share-based payment transactions involving non-employees in exchange for goods or services. The standard requires entities to recognize the fair value of the equity instruments issued to non-employees and measure the share-based compensation expense based on the fair value of the goods or services received, or the fair value of the equity instruments issued, whichever is more reliably measurable.

 

Key Provisions of ASC 505-50
 

  1. Recognition of Share-Based Compensation Expense: An entity must recognize share-based compensation expense for equity-based payments to non-employees over the period during which the non-employee provides goods or services.
     

  2. Measurement of Share-Based Compensation Expense: The share-based compensation expense is measured based on the fair value of the goods or services received, or the fair value of the equity instruments issued, whichever is more reliably measurable.
     

  3. Subsequent Measurement and Adjustments: Entities must periodically reassess the fair value of the equity instruments issued to non-employees and adjust the share-based compensation expense accordingly.

 

Journal Entries for Share-Based Compensation Expense Transaction under ASC 505-50

To illustrate the journal entries for recognizing share-based compensation expense under ASC 505-50, let's assume a company issues 1,000 shares of its common stock to a consultant for providing services over a 12-month period.
 

1. Initial Recognition of Share-Based Compensation Expense:

Assume the fair value of the common stock is $10 per share at the grant date, and the fair value of the services received from the consultant is not more reliably measurable. The total share-based compensation expense would be:
 

Total Share-Based Compensation Expense = 1,000 shares * $10 = $10,000
 

The share-based compensation expense is recognized over the 12-month service period. Assuming a straight-line method for recognition, the monthly share-based compensation expense would be:
 

Monthly Share-Based Compensation Expense = $10,000 / 12 months = $833.33
 

The journal entry for the first month's share-based compensation expense would be:
 

Share-Based Compensation Expense (Consulting) $833.33

Additional Paid-In Capital $833.33

 

2. Subsequent Adjustments:

If the fair value of the common stock changes during the service period, the company must adjust the share-based compensation expense accordingly. For example, if the fair value of the common stock increases to $12 per share after six months, the total share-based compensation expense would be revised as follows:
 

Revised Total Share-Based Compensation Expense = 1,000 shares * $12 = $12,000
 

The remaining share-based compensation expense of $6,000 ($12,000 - $5,000) is recognized over the remaining six months:
 

Monthly Revised Share-Based Compensation Expense = $6,000 / 6 months = $1,000
 

The journal entry for the seventh month's share-based compensation expense, reflecting the revised fair value, would be:
 

Share-Based Compensation Expense (Consulting) $1,000

Additional Paid-In Capital $1,000
 

ASC 505-50 provides essential guidance on the accounting treatment for equity-based payments to non-employees, ensuring that financial statements accurately reflect the entity's share-based compensation expense and the economic substance of the transactions. By requiring entities to recognize the fair value of the equity instruments issued to non-employees and measure the share-based compensation expense based on the fair value of the goods or services received, the standard promotes transparency and comparability in financial reporting.