ASC 505-50 was the U.S. GAAP subtopic that governed how a company accounted for stock, options, or warrants issued to nonemployees in exchange for goods or services. It no longer drives current accounting. In June 2018 the FASB issued ASU 2018-07, which superseded the measurement and recognition guidance in ASC 505-50 and moved nonemployee share-based payments into ASC 718, the same standard used for employee awards.1Financial Accounting Standards Board. ASU 2018-07 Compensation – Stock Compensation (Topic 718) If you are looking at legacy financial statements or trying to understand what changed, both frameworks still matter.
What ASC 505-50 Applied To
The subtopic covered transactions where a company issued equity instruments to acquire goods or services from someone who was not an employee: consultants, outside legal counsel, freelance developers, vendors accepting stock instead of cash. It governed the grantor’s side, dictating how the company measured and recognized the cost.
The dividing line between ASC 505-50 and ASC 718 was the grantee’s status. Employees, including nonemployee directors serving on a company’s board, fell under ASC 718. Independent contractors, consultants, and other outside parties providing goods or services fell under ASC 505-50.
Two categories sat outside the subtopic. Equity issued to a lender in a financing arrangement was excluded, because the transaction was about raising capital, not buying services. Equity granted to a customer went to ASC 606 as consideration payable to a customer that reduces the transaction price.
The Measurement Change: Then and Now
The biggest practical difference between the old and current rules is when you lock in fair value.
Under Old ASC 505-50
The measurement date for an equity-classified nonemployee award was the earlier of two events: the date the nonemployee’s performance was complete, or the date a “performance commitment” was reached. A performance commitment existed only when penalties for nonperformance were large enough to make completion essentially certain. Proving that before services were finished was difficult, so in practice the measurement date defaulted to the completion date.
The result was a mark-to-market effect. If a consultant received options vesting over two years, the company recalculated the award’s fair value at every reporting date using the current stock price and updated assumptions. A rising stock price meant escalating expense; a falling price meant reversals. Income statement volatility was a constant headache, particularly for companies with volatile share prices or long service periods.
Under Current ASC 718
ASU 2018-07 replaced that regime with grant-date measurement, consistent with employee awards. The grant date is the date on which grantor and grantee reach a mutual understanding of the award’s key terms and conditions. Fair value is calculated once, at that point, and does not change as the stock price moves afterward.1Financial Accounting Standards Board. ASU 2018-07 Compensation – Stock Compensation (Topic 718)
Liability-classified awards are still remeasured at fair value each reporting period until settlement, whether the grantee is an employee or nonemployee.
Public business entities applied the new rules for fiscal years beginning after December 15, 2018. All other entities adopted for fiscal years beginning after December 15, 2019, with interim-period application required for fiscal years beginning after December 15, 2020.1Financial Accounting Standards Board. ASU 2018-07 Compensation – Stock Compensation (Topic 718)
One safeguard carried forward from ASC 505-50: ASC 718 explicitly does not apply to equity instruments granted as a means of raising capital disguised as a service arrangement. If the substance is financing, it stays outside the share-based payment framework.
Calculating Fair Value
The starting point under both the old and current rules is the same: can you reliably measure the fair value of the goods or services received? If so, that direct measurement is preferred, because it reflects what the company would have paid in cash. A law firm’s standard hourly rate or a vendor’s published pricing makes this straightforward.
When the fair value of services cannot be reliably determined, the company measures the fair value of the equity instruments instead. For common stock in a publicly traded company, fair value is the market price. For options and warrants, the company uses an established valuation model.
ASC 718 does not mandate a specific model. Black-Scholes-Merton and binomial or lattice models are both acceptable, as are Monte Carlo simulations. A straightforward time-vested option might use Black-Scholes; an award with a market condition or complex vesting features typically calls for a lattice model or simulation that can capture path-dependent outcomes. Key inputs include the current share price, exercise price, expected volatility, risk-free interest rate, expected dividends, and expected term.
Valuation is harder for private companies. Without a publicly traded stock price, the current price input requires a separate analysis, often a 409A valuation performed by an independent specialist. ASU 2021-07 added a practical expedient allowing nonpublic entities to use a value determined by the reasonable application of a reasonable valuation method as the current price input for equity-classified awards at grant date.2Financial Accounting Standards Board. ASU 2021-07 Compensation – Stock Compensation (Topic 718)
Where Nonemployee Accounting Still Differs From Employee Accounting
ASU 2018-07 kept two carve-outs where nonemployee awards do not follow the employee model: the inputs to an option pricing model, and cost attribution.1Financial Accounting Standards Board. ASU 2018-07 Compensation – Stock Compensation (Topic 718)
Cost attribution is the more visible of the two. For employee awards, expense is typically recognized ratably over the service period. For nonemployee awards, cost attribution follows the pattern of the nonemployee’s performance. If a consultant delivers most of the work in the first quarter and wraps up in the second, expense recognition follows that actual delivery pattern rather than a straight-line allocation. Getting this right requires tracking the nonemployee’s progress, which can be messy when the engagement lacks clear milestones.
Awards with performance conditions add another layer. Consistent with the employee model, the company considers the probability that the performance condition will be satisfied when recognizing cost. If the condition becomes probable mid-period, previously unrecognized cost is caught up.
Once fair value is determined, the entry depends on what the company received. Immediate operating services such as consulting or marketing are debited to an expense account. Services that produce a long-term asset, like custom software development, are debited to an asset account and amortized over the useful life. The credit goes to additional paid-in capital for equity-classified awards or to a liability account for liability-classified awards.
Practical Expedients for Nonpublic Entities
ASU 2018-07 extended two expedients previously available only for employee awards to nonemployee awards.
Nonpublic entities may elect to measure all liability-classified awards at intrinsic value instead of fair value. If the entity already uses this election for employee awards, the same policy must apply to nonemployee awards. This avoids the cost of periodic fair value remeasurement for liability-classified instruments.
Nonpublic entities may also estimate the expected term of nonemployee stock options using a simplified midpoint method: the midpoint between the vesting date and the contractual expiration date. The election is available only for options granted at the money, that the grantee cannot sell or hedge, that require exercise within a short window (typically 30 to 90 days) after the grantee stops providing services, and that contain no market condition. It is an entity-wide election and must be applied consistently to both employee and nonemployee awards that meet the criteria.
Disclosure
ASC 718’s disclosure requirements now apply to nonemployee awards. Companies disclose the number and weighted-average fair value of equity instruments granted, exercised, and forfeited during the period, along with the valuation method and key assumptions used in any pricing model.
Separate disclosure is expected when nonemployee awards differ materially from employee awards in characteristics or terms. If a company grants performance-conditioned options to consultants but only time-vested options to employees, those categories warrant separate presentation. The same principle applies to awards classified as equity versus those classified as liabilities.
Tax Reporting Under IRC Section 83
The accounting treatment sets what appears on the financial statements. A parallel set of rules governs how the equity is taxed, and IRC Section 83 controls for both parties.
Under Section 83(a), when property including stock is transferred in connection with services, the service provider must include in gross income the excess of the property’s fair market value over any amount paid for it. The taxable event occurs at the first point the property is either transferable or no longer subject to a substantial risk of forfeiture, whichever comes first.3Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services For a consultant who receives restricted stock vesting over two years, the taxable income typically hits when each tranche vests.
Section 83(b) offers an alternative. The service provider can elect to recognize taxable income at the time of transfer, before restrictions lapse. The election must be filed with the IRS within 30 days of the transfer date. Missing that deadline makes the election invalid, with no extensions or workarounds.3Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
The gamble is straightforward. If the stock’s value increases significantly between grant and vesting, the consultant pays tax on a smaller amount by electing early. If the stock declines or is forfeited, the consultant has paid tax on income they never truly received and gets no deduction for the forfeiture. The service provider must also give a copy of the election to the issuing company, which allows the company to accelerate its corresponding tax deduction.
The company issuing equity to a nonemployee reports the fair value of the compensation on Form 1099-NEC.4Internal Revenue Service. About Form 1099-NEC, Nonemployee Compensation