ASC 505-50 was the U.S. GAAP subtopic that governed how a company accounted for stock, options, warrants, and other equity instruments issued to nonemployees in exchange for goods or services. It is largely no longer in force. In June 2018, the FASB issued ASU 2018-07, which superseded the measurement and recognition guidance in ASC 505-50 and moved nonemployee share-based payments into ASC 718, the same standard that governs employee awards.1Financial Accounting Standards Board. ASU 2018-07 Compensation – Stock Compensation (Topic 718) If you are accounting for a consultant’s options today, you apply ASC 718 with two narrow carve-outs. If you are reading financial statements from before the adoption date, you are seeing the old ASC 505-50 model, which worked very differently.
What ASC 505-50 Applied To
ASC 505-50 covered transactions in which a company issued equity instruments to acquire goods or services from someone who was not an employee. Consultants, outside counsel, freelance developers, and vendors willing to accept stock instead of cash all fell inside its scope. The standard governed the grantor’s side of the transaction, prescribing how the company measured and recognized the cost on its own financial statements.
The line between ASC 505-50 and ASC 718 was the recipient’s status. Employees, including nonemployee directors serving on the board, were covered by ASC 718. Independent contractors and other outside parties providing goods or services sat under ASC 505-50.
Two types of equity transactions were outside ASC 505-50. Equity issued to a lender as part of a financing arrangement was excluded, because those transactions raise capital rather than purchase services. Equity granted to a customer fell under ASC 606’s revenue recognition rules, treated as consideration payable to a customer that reduces the transaction price.
How ASU 2018-07 Superseded Most of It
ASU 2018-07 expanded ASC 718 to cover share-based payments to nonemployees for goods and services, superseding the measurement and recognition guidance in ASC 505-50 and substantially aligning nonemployee accounting with the employee model.1Financial Accounting Standards Board. ASU 2018-07 Compensation – Stock Compensation (Topic 718)
Effective dates were staggered. 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. Early adoption was permitted so long as the entity had already adopted ASC 606.1Financial Accounting Standards Board. ASU 2018-07 Compensation – Stock Compensation (Topic 718)
The anti-abuse principle from ASC 505-50 carried forward. ASC 718 explicitly does not apply to equity instruments granted as a means of raising capital disguised as a service arrangement. If the substance of the transaction is financing, it stays outside the share-based payment framework.
The Change That Mattered Most: Grant-Date Measurement
The single biggest practical consequence of ASU 2018-07 was the end of ongoing remeasurement for equity-classified nonemployee awards.
How ASC 505-50 Worked
Under the old standard, 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 the penalties for nonperformance were large enough to make completion essentially certain. That threshold was difficult to establish before services were finished, so in practice the measurement date defaulted to the completion date.
The effect was mark-to-market. 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 pushed expense up; a falling price produced reversals. For companies with volatile shares or long service periods, the income-statement swings were significant and difficult to forecast.
How ASC 718 Works Now
ASU 2018-07 replaced that regime with grant-date measurement, the same approach ASC 718 has always used for employees. The grant date is the date on which the 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 move with the stock price afterward.1Financial Accounting Standards Board. ASU 2018-07 Compensation – Stock Compensation (Topic 718)
Liability-classified awards are the exception. They are still remeasured at fair value at the end of each reporting period until settlement, whether the recipient is an employee or a nonemployee.
How Fair Value Is Measured
The starting question under both the old and current frameworks 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 otherwise 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 applies an established valuation model.
ASC 718 does not require a specific model. Black-Scholes-Merton, binomial or lattice models, and Monte Carlo simulations are all acceptable. The choice follows the award’s features. A time-vested option might fit Black-Scholes; an award with a market condition or path-dependent vesting typically calls for a lattice model or simulation. Standard inputs include the current share price, exercise price, expected volatility, risk-free interest rate, expected dividends, and expected term.
Private companies have a harder time with the current-price input. Without a market price, that input usually comes from a separate analysis such as a 409A valuation. 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
Alignment is not identical. ASU 2018-07 preserved two carve-outs where nonemployee awards still receive different treatment from employee awards: the inputs to an option pricing model and cost attribution, meaning how expense is spread across the service period.1Financial Accounting Standards Board. ASU 2018-07 Compensation – Stock Compensation (Topic 718)
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 finishes in the second, expense recognition tracks that actual delivery pattern rather than a straight line. Doing this well means tracking the nonemployee’s progress, which can be awkward when the engagement has no clear milestones.
Performance conditions add a layer that mirrors the employee model. The company considers the probability that the condition will be satisfied when recognizing cost. If the condition becomes probable mid-period, previously unrecognized cost is caught up at that point.
On the entry side, the accounting follows what the company received. Immediate operating services are debited to an expense account such as consulting expense or general and administrative expense. Services that produce a long-term asset, such as custom software development, are capitalized 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 that had been available only for employee awards to nonemployee awards.
A nonpublic entity 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 has to apply to nonemployee awards. This avoids the cost of periodic fair value remeasurement for liability-classified instruments.
A nonpublic entity 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 only available for options that are 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. The election is entity-wide and must be applied consistently to both employee and nonemployee awards that meet those criteria.
Disclosure Requirements
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 the 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.
Why Legacy Statements Still Matter
Even after adoption, ASC 505-50 does not disappear from view. Financial statements covering periods before an entity’s adoption of ASU 2018-07 reflect the old performance-completion measurement date and the mark-to-market expense pattern that came with it. If you are analyzing historical trends, comparing pre- and post-adoption years, or reviewing nonemployee award expense in older filings, the swings you see are a feature of the superseded standard, not an error. The accounting treatment and the standard that produced it travel with the period they were reported in.