A Roadmap to Accounting for Share-Based Payment Awards2017

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Contents

Preface xiii

Acknowledgments xv

Contacts xvi

Chapter 1 Overview 11.1Objective 1

1.2SubstantiveTerms 1

1.3Scope 2

1.4Recognition 3

1.5Measurement 4

1.6Classification 4

1.7NonpublicEntities 5

1.7.1Calculated Value 6

1.7.2Intrinsic Value 6

1.7.3Expected Term 6

1.7.4Transition to Public Entity 6

1.8ComparisonWithIFRSs 6

Chapter2Scope 82.1General 8

2.2DefinitionofEmployee 11

2.3NonemployeeDirectors 13

2.3.1Parent-Entity Directors 14

2.3.2Subsidiary Directors 14

2.4NonemployeeAwards 15

2.5EconomicInterestHolders 16

2.6ProfitsInterests 17

2.7RabbiTrusts 19

2.7.1Accounting for a Deferred Compensation Arrangement as Two Plans 19

2.7.2Accounting for a Deferred Compensation Arrangement as One Plan 20

2.8ConsolidatedFinancialStatements 21

2.9SeparateFinancialStatements 21

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2.10EquityMethodInvestments 23

2.10.1Accounting in the Financial Statements of the Contributing Investor Issuing the Awards 27

2.10.2Accounting in the Financial Statements of the Investee Receiving the Awards 27

2.10.3Accounting in the Financial Statements of the Noncontributing Investors 27

2.10.4Accounting in the Financial Statements of the Contributing Investor Receiving the Reimbursement 27

2.10.5Accounting in the Financial Statements of the Investee Receiving the Awards and Making the Reimbursement 28

2.10.6Accounting in the Financial Statements of the Noncontributing Investors 28

2.11UnrelatedEntityAwards 28

2.12EscrowedShareArrangements 31

Chapter3Recognition 333.1GeneralRecognitionPrinciples 33

3.2DeterminingtheGrantDate 34

3.2.1Approval 36

3.2.2Communication Date 37

3.2.3Unknown Vesting Conditions 38

3.2.4Unknown Exercise Price 40

3.2.5Discretionary Provisions 41

3.3NonvestedSharesVersusRestrictedShares 43

3.4VestingConditions 44

3.4.1 Service Condition 45

3.4.1.1Estimating Forfeitures 47

3.4.1.2Accounting for Forfeitures When They Occur 52

3.4.2Performance Condition 54

3.4.2.1Performance Conditions Associated With Liquidity Events 55

3.4.2.2Performance Conditions Satisfied After the Requisite Service Period 56

3.4.3Repurchase Features That Function as Vesting Conditions 57

3.5MarketCondition 59

3.6RequisiteServicePeriod 61

3.6.1Explicit Service Period 63

3.6.2Implicit Service Period 63

3.6.3Derived Service Period 63

3.6.4Service Inception Date 64

3.6.5Graded Vesting Awards 68

3.6.6Nonsubstantive Service Condition 76

3.6.6.1Retirement Eligibility 76

3.6.6.2Noncompete Agreements 77

3.6.6.3Deep Out-of-the-Money Stock Options 80

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3.7MultipleConditions 81

3.7.1Only One Condition Must Be Met 86

3.7.2Multiple Conditions Must Be Met 88

3.7.2.1Liquidity Event and Target IRR 90

3.7.2.2Multiple Performance Conditions That Affect Vesting and Nonvesting Factors 91

3.7.3Multiple Conditions and Multiple Service Periods 91

3.7.3.1Multiple Performance Conditions and Multiple Service Periods 92

3.7.3.2Multiple Service Periods Related to Exercise Price 93

3.7.3.3Multiple Service Periods Related to Transferability 93

3.8ChangesinEstimate 94

3.9ClawbackFeatures 96

3.10DividendProtectedAwards 99

3.11NonrecourseandRecourseNotes 102

3.11.1Recourse Notes 102

3.11.2Nonrecourse Notes 103

3.11.3Changes Made to the Note 103

3.11.4In-Substance Nonrecourse Note 104

3.11.5Combination Recourse and Nonrecourse Loan 104

3.12PayrollTaxes 104

3.13CapitalizationofCompensationCost 105

Chapter4Measurement 1064.1Fair-Value-BasedMeasurement 106

4.1.1Vesting Conditions 107

4.1.2Reload and Contingent Features 109

4.2MeasurementObjective 110

4.3ObservableMarketPrice 115

4.4MeasurementDate 115

4.5MarketConditions 115

4.6ConditionsThatAffectFactorsOtherThanVestingorForfeitability 120

4.6.1Market, Performance, and Service Conditions 121

4.6.2Other Conditions 125

4.7NonvestedShares 125

4.8RestrictedShares 126

4.8.1Options on Restricted Shares 128

4.8.2Limited Population of Transferees 128

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4.9OptionPricingModels 128

4.9.1Change in Valuation Technique 132

4.9.2Assumptions in an Option Pricing Model 134

4.9.2.1Risk-Free Interest Rate 137

4.9.2.2Expected Term 137

4.9.2.3Expected Volatility 149

4.9.2.4Expected Dividends 161

4.9.2.5Credit Risk and Dilution 161

4.9.3Market-Based Measure of Employee Stock Options 162

4.10ValuationofAwardsWithGradedVestingSchedule 165

4.11DifficultyofEstimation 165

4.12ValuationofNonpublicEntityAwards 166

4.12.1Cheap Stock 167

4.12.2Internal Revenue Code Section 409A 167

4.12.3Purchases of Shares From Employees 168

4.12.3.1Entity Purchases of Shares From Employees 168

4.12.3.2Investor Purchases of Shares From Employees 168

4.13PracticalExpedientsforNonpublicEntities 170

4.13.1Application 170

4.13.1.1Fair-Value-Based Measurement Exceptions 170

4.13.1.2Expected-Term Practical Expedient 170

4.13.2Calculated Value 171

4.13.3Intrinsic Value 175

4.13.4Transition From Nonpublic to Public Entity Status 177

Chapter 5 Classification 1815.1General 181

5.2ASC480 183

5.3ShareRepurchaseFeatures 186

5.3.1Repurchase Features Puttable Stock Awards 189

5.3.1.1Repurchase Features Noncontingent Puttable Stock Awards 189

5.3.1.2Repurchase Features Contingently Puttable Stock Awards 192

5.3.2Repurchase Features Callable Stock Awards 194

5.3.2.1Repurchase Features Noncontingent Callable Stock Awards 195

5.3.2.2Repurchase Features Contingently Callable Stock Awards 197

5.3.3Book-Value Plans 199

5.3.4Repurchase Features That Function as Vesting Conditions or Clawback Features 200

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5.4StockOptions 200

5.4.1Classification of Underlying Shares 200

5.4.2Cash Settlement Features 200

5.4.2.1Noncontingent Cash Settlement Features (Including Tandem and Combination Awards) 204

5.4.2.2Contingent Cash Settlement Features 206

5.4.2.3Early Exercise of a Stock Option or Similar Instrument 207

5.4.3Net Share Settlement Features 208

5.4.4Broker-Assisted Cashless Exercise 208

5.5IndexationtoOtherFactors 209

5.6SubstantiveTerms 210

5.7ExceptionstoLiabilityClassification 211

5.7.1Foreign Currency 211

5.7.2Statutory Tax Withholding Obligation 212

5.7.2.1Hypothetical Withholdings 213

5.7.2.2Cash Settlement of Fractional Shares 213

5.7.2.3Changes in the Amount Withheld 213

5.8AwardsThatBecomeSubjecttoOtherGuidance 214

5.8.1Awards Issued in Exchange for Employee Services Only 215

5.8.2Equity Restructurings 215

5.8.3Nonemployee Awards 215

5.9ChangeinClassificationDuetoChangeinProbableSettlementOutcome 216

5.10SECGuidanceonTemporaryEquity 216

Chapter6Modifications 2266.1AccountingfortheEffectsofModifications 226

6.1.1The Fair Value Assessment 233

6.1.1.1Determining Whether a Fair Value Calculation Is Required 233

6.1.1.2Considering Whether Compensation Cost Recognized Has Changed 233

6.1.1.3Determining the Unit of Account 234

6.1.1.4Determining Whether the Fair Value Is the Same Before and After Modification 234

6.1.2Examples of Changes for Which Modification Accounting Would or Would Not Be Required 235

6.2ModificationDate 236

6.3ImpactofVestingConditions 237

6.3.1Probable to Probable Modifications 238

6.3.2Probable to Improbable Modifications 241

6.3.3Improbable to Probable Modifications 242

6.3.4Improbable to Improbable Modification 245

6.3.5Modifications to Accelerate Vesting of Deep Out-of-the-Money Stock Options 247

6.3.6Modification of the Requisite Service Period 248

6.3.6.1Modification to Reduce the Requisite Service Period of an Award 248

6.3.6.2Modification to Increase the Requisite Service Period of an Award 249

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6.4ModificationofFactorsOtherThanVestingConditions 250

6.4.1Modification of a Market Condition 250

6.4.2Modification of Stock Options During Blackout Periods 251

6.5EquityRestructuring 252

6.5.1Antidilution Provisions 252

6.5.1.1Original Award Contains a Nondiscretionary Antidilution Provision 253

6.5.1.2Modification to Add a Nondiscretionary Antidilution Provision in Contemplation of an Equity Restructuring 254

6.5.1.3Modification to Add a Nondiscretionary Antidilution Provision That Is Not in Contemplation of an Equity Restructuring 256

6.5.2Spin-Offs 256

6.5.2.1Attribution of Compensation Cost in a Spin-Off 256

6.5.2.2Classification of Awards in a Spin-Off 257

6.5.2.3Determining the Market Price Before and After a Spin-Off 257

6.5.3Accounting for Awards Modified in Conjunction With an Equity Restructuring Held by Individuals No Longer Employed 258

6.6BusinessCombination 259

6.7Short-TermInducements 259

6.8ModificationsThatResultinaChangeinClassification 260

6.8.1Modification From an Equity Award to a Liability Award 260

6.8.2Modification From a Liability Award to an Equity Award 266

6.9ModificationsUnderASR268 270

6.10RepurchasesandSettlements 273

6.10.1Cash Settlements 273

6.10.2Cash Settlements Versus Modifications 276

6.11Cancellations 279

6.12ModificationsThatChangetheScopeofAwards 280

6.13ModificationsWhenaHolderIsNoLongeranEmployee 281

Chapter7Liability-ClassifiedAwards 2847.1Fair-Value-BasedMeasurement 284

7.2Recognition 286

7.3Intrinsic-ValuePracticalExpedientforNonpublicEntities 288

7.4Modifications 290

Chapter8EmployeeStockPurchasePlans 2938.1Scope 293

8.2NoncompensatoryPlans 294

8.2.1First Condition in ASC 718-50-25-1 294

8.2.2Second Condition in ASC 718-50-25-1 296

8.2.3Third Condition in ASC 718-50-25-1 297

8.3RequisiteServicePeriod 297

8.4Forfeitures 300

8.5Measurement 301

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8.6ChangesinEmployeeWithholdings 301

8.6.1Increase in Withholdings 302

8.6.2Decrease in Withholdings 302

8.7Look-BackPlans 303

8.7.1Basic Look-Back Plans 305

8.7.2Variable Versus Maximum Number of Shares 307

8.7.3Multiple Purchase Periods 309

8.7.4Reset or Rollover Mechanisms 310

8.7.5Retroactive Cash Infusion Election 311

Chapter9NonemployeeAwards 3129.1NonemployeeAwards 312

9.2Scope 315

9.3Measurement 317

9.3.1Fair-Value-Based Measurement Versus Fair Value of Goods or Services Received 317

9.3.2Measurement Date 318

9.3.2.1Performance Commitment 319

9.3.2.2Performance Is Complete 322

9.3.2.3Fully Vested, Nonforfeitable Instruments 322

9.3.3Measurement If Quantity and Terms Are Known Up Front 323

9.3.4Measurement If Quantity and Terms Are Not Known Up Front 325

9.3.4.1Counterparty Performance Conditions 326

9.3.4.2Market Conditions 330

9.3.4.3Both Counterparty Performance Conditions and Market Conditions 332

9.3.5Calculated Value and Intrinsic Value 334

9.3.6Expected Term 335

9.4Recognition 335

9.4.1Recognition of Goods and Services 337

9.4.2Forfeitures 337

9.4.3Fully Vested, Nonforfeitable Awards 338

9.5Classification 338

9.6Liability-ClassifiedAwards 339

9.7Modifications 339

9.8AccountingOncePerformanceIsComplete 339

9.9AnalogytoASC718 343

9.10Presentation 344

9.10.1Balance Sheet 345

9.10.2Statement of Operations 345

9.11Disclosures 346

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Chapter10BusinessCombinations 34710.1ReplacementofAcquireeAwards 347

10.2AllocatingReplacementAwardsBetweenConsiderationTransferredandPostcombination Compensation Cost 348

10.2.1Allocation Steps 351

10.2.1.1Considerations Related to Step 1 352

10.2.1.2Considerations Related to Step 2 353

10.2.1.3Considerations Related to Step 3 353

10.2.2Forfeitures 355

10.2.3Awards With a Graded Vesting Schedule 355

10.3ChangesReflectedinPostcombinationCompensationCost 358

10.3.1Changes in Forfeiture Estimates or Actual Forfeitures in the Postcombination Period 358

10.3.2Changes in the Probability of Meeting a Performance Condition in the Postcombination Period 365

10.4AccelerationofVestingUponaChangeinControl 368

10.4.1Acquirer Accelerates Vesting 368

10.4.2Acceleration of Vesting Included in the Original Terms of the Awards 369

10.4.3Modification to the Original Terms of the Awards to Add a Change-in-Control Provision in Contemplation of a Business Combination 370

10.5CashSettlementUponaChangeinControl 370

10.5.1Acquirer Cash Settles the Acquirees Awards 371

10.5.2Cash-Settlement Provision Included in the Original Terms of the Award 371

10.5.2.1Fully Vested Awards That Are Cash Settled Upon a Change in Control 371

10.5.2.2Partially Vested Awards That Are Cash Settled Upon a Change in Control 372

10.6ContingentConsideration 373

10.7StayBonusArrangement 373

10.8Last-Man-StandingAwards 374

10.9GoldenParachuteArrangements 375

10.10IncomeTaxAccounting 375

10.10.1Tax Benefits of Deductible Share-Based Payment Awards 376

10.10.1.1Income Tax Accounting as of the Acquisition Date 376

10.10.1.2Income Tax Accounting After the Acquisition Date 376

10.10.1.3Income Tax Accounting Upon Vesting or Exercise of the Share-Based Payment Awards 376

10.10.2Tax Benefits From a Disqualifying Disposition 379

Chapter11IncomeTaxAccounting 380

Chapter 12 Presentation 38212.1StatementofFinancialPosition 382

12.1.1Receivables 382

12.1.2Deferred Tax Assets 383

12.1.3Capitalization of Inventory 384

12.1.4Fully Vested Nonemployee Awards 384

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12.2StatementofOperations 385

12.2.1Classification of Compensation Expense 385

12.2.2Share-Based Payment Awards Granted to Employees of an Equity Method Investee 386

12.2.3Nonemployee Awards 387

12.2.4Payroll Taxes 387

12.3StatementofCashFlows 387

12.4EarningsperShare 388

12.4.1Basic EPS 389

12.4.2Diluted EPS 389

12.4.2.1Treasury Stock Method 391

12.4.2.2Service Conditions 400

12.4.2.3Performance and Market Conditions 402

12.4.3Participating Securities and the Two-Class Method 405

12.4.3.1Participating Securities 408

12.4.3.2Computation Under the Two-Class Method 410

12.4.4Settlement in Shares or Cash 421

12.4.5Early Exercise of Stock Options 423

12.4.5.1Basic EPS 423

12.4.5.2Diluted EPS 423

12.4.6Employee Stock Purchase Plans 424

12.4.7Redeemable Awards 424

12.4.7.1Share-Based Payment Awards Redeemable at Fair Value 425

12.4.7.2Share-Based Payment Awards Redeemable at an Amount Other Than Fair Value 426

12.4.7.3Share-Based Payment Awards Redeemable at Intrinsic Value 426

12.4.7.4Contingently Redeemable Share-Based Payment Awards 426

12.4.8Awards of a Consolidated Subsidiary 427

12.4.8.1Share-Based Payment Awards Issued by a Consolidated Subsidiary and Settled in the Subsidiarys Common Shares 427

12.4.8.2Share-Based Payment Awards Issued by a Subsidiary but Settled in the Parents Common Shares 430

Chapter13Disclosure 43113.1DisclosureObjective 431

13.2MinimumDisclosures 431

13.3ExamplesofRequiredDisclosures 434

13.4InterimReporting 437

13.5SubsidiaryDisclosures 439

13.6NonemployeeAwards 440

13.7ChangeinValuationTechniques 440

13.8TransitionFromNonpublictoPublicEntityStatus 442

13.9MD&ADisclosuresExpectedVolatility 445

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AppendixAFASBSimplifiestheAccountingforShare-BasedPayments 446

AppendixBFrequentlyAskedQuestionsAboutASU2016-09 453

AppendixCFASBProposesImprovementstotheAccountingforShare-Based PaymentArrangementsWithNonemployees 461

AppendixDFASBAmendstheScopeofModificationAccountingfor Share-BasedPaymentArrangements 471

AppendixEiGAAP 479

AppendixFGlossaryofStandardsandOtherLiterature 626

AppendixGAbbreviations 630

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Preface

November 2017

To our clients, colleagues, and other friends:

We are pleased to present the 2017 edition of A Roadmap to Accounting for Share-Based Payment Awards. This Roadmap provides Deloittes insights into and interpretations of the guidance on share-based payment arrangements in ASC 7181 (employee awards) and ASC 505-50 (nonemployee awards) as well as in other literature (e.g., ASC 260 and ASC 805).

Over the years, the FASB has been busy working on projects associated with its simplification initiative. The Boards objective is to reduce the cost and complexity of current U.S. GAAP while maintaining or enhancing the usefulness of the related financial statement information. In 2016 and 2017, as part of this initiative, the Board issued ASU 2016-09 and ASU 2017-09, which significantly simplified the application of ASC 718 to employee share-based payment arrangements. But the FASB is not done. In March 2017, it issued a proposed ASU that would simplify the guidance on nonemployee share-based payments for goods and services (currently in ASC 505-50). Under the proposal, most of the guidance on such payments would be aligned with the requirements for employee share-based payments in ASC 718. We believe that the proposed guidance, if finalized, will be welcomed by constituents because of the complexity currently associated with applying requirements under both ASC 505-50 and ASC 718.

The 2017 edition of this Roadmap reflects changes to the accounting framework introduced by the FASBs issuance of ASU 2016-09 and ASU 2017-09. Those changes can be briefly summarized as follows:

ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance also contains two practical expedients under which nonpublic entities can use a simplified method to estimate the expected term of an award and make a one-time election to switch from fair-value-based measurement to intrinsic value measurement for liability-classified awards.

For public business entities, ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. For all other entities, the ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual reporting periods beginning after December 15, 2018. Early adoption is permitted in any interim or annual period for which financial statements have not yet been issued or have not been made available for issuance. If early adoption is elected in an interim period, any adjustments should be reflected as of the beginning of the annual period that includes that interim period.

1 For the full titles of standards, topics, regulations, and abbreviations used in this publication, see Appendixes F and G. Note that this Roadmap does not cover the guidance on employee stock ownership plans in ASC 718-40.

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Preface

ASU 2017-09 amends the scope of modification accounting for share-based payment arrangements. Under the ASU, an entity is not required to apply the modification accounting guidance in ASC 718 if the fair-value-based measure, vesting conditions, and classification of share-based payment awards are the same immediately before and after the modification.

For all entities, ASU 2017-09 is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted in any interim or annual period for which financial statements have not yet been issued or have not been made available for issuance.

For more information about ASUs 2016-09 and 2017-09, see Appendixes A, B, and D of this Roadmap.

While ASUs 2016-09 and 2017-09 are not yet effective for all companies, the guidance in this Roadmap is written as if adoption has occurred. For a discussion of the guidance on share-based payment awards before the ASUs adoption, see Deloittes 2015 edition of this Roadmap.

The body of the Roadmap combines the share-based payment accounting rules with Deloittes interpretations and examples in a comprehensive, reader-friendly format. Each chapter typically includes excerpts of guidance, Deloittes interpretations of those excerpts, and examples to illustrate the relevant guidance. In addition, Appendix E contains Chapter A16, Share-based Payment, of Deloittes iGAAP publication, for readers interested in the accounting under IFRS 2.

Note that this publication is not a substitute for the exercise of professional judgment, which is often essential to applying the accounting requirements for share-based payment awards. It is also not a substitute for consulting with Deloitte professionals on complex accounting questions and transactions.

Subscribers to the Deloitte Accounting Research Tool (DART) may access any interim updates to this publication by selecting the document from the Roadmaps tab on DARTs home page. If a Summary of Changes Since Issuance displays, subscribers can view those changes by clicking the related links or by opening the active version of the Roadmap.

We hope that you find this publication a valuable resource when considering the accounting guidance on share-based payment arrangements.

Sincerely,

Deloitte & Touche LLP

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Acknowledgments

Sandie Kim supervised the overall preparation of this Roadmap and extends her deepest appreciation to all the professionals on Deloittes Accounting Services team who helped in its development. She is particularly grateful for the leadership and technical contributions of Curt Weller, Shahara Jasion, Jonathan Margate, and May Yu.

Sandie also wishes to express her immense gratitude to the members of our Production group for their contributions especially Lynne Campbell, who worked with the authors to improve the Roadmaps readability; Jeanine Pagliaro, who copy edited the document; Dave Frangione, who designed the publications graphics and page layouts; and Teri Asarito, who helped expedite the desktop publishing effort.

In addition, Sandie would like to thank the many other Accounting Services team members who helped see this Roadmap through to completion, including Steve Barta, Ashley Carpenter, Derek Gillespie, Sean May, Ignacio Perez, John Wilde, Jeff Jenkins, Brianne Loyd, Blair McCauley, Jason Pimenta, Lindsey Simpson, and Charlie Steward.

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Contacts

If you have questions about the information in this publication, please contact either of the following Deloitte professionals:

Sandie Kim Partner Deloitte & Touche LLP +1 415 783 4848 sandkim@deloitte.com

Curt Weller Partner Deloitte & Touche LLP +1 415 783 4995 cweller@deloitte.com

1

Chapter 1 Overview

1.1Objective

ASC 718-10

10-1 The objective of accounting for transactions under share-based payment arrangements with employees is to recognize in the financial statements the employee services received in exchange for equity instruments issued or liabilities incurred and the related cost to the entity as those services are consumed. This Topic uses the terms compensation and payment in their broadest senses to refer to the consideration paid for employee services.

10-2 This Topic requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Topic establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee stock ownership plans.

To incentivize employee performance and align the interests of employees and shareholders, entities often grant employees share-based payment awards such as stock options, restricted stock,1 restricted stock units, stock appreciation rights, and other equity-based instruments. Such awards are a form of compensation. An objective of ASC 718 is for the cost of that compensation to be recognized in an entitys financial statements as the services associated with the awards are provided. The amount of cost to recognize is generally based on the fair value of the share-based payment arrangement, and ASC 718 requires entities to apply a fair-value-based measurement method when accounting for such arrangements with employees.2

1.2Substantive Terms

ASC 718-10-20 Glossary

Terms of a Share-Based Payment AwardThe contractual provisions that determine the nature and scope of a share-based payment award. For example, the exercise price of share options is one of the terms of an award of share options. As indicated in paragraph 718-10-25-15, the written terms of a share-based payment award and its related arrangement, if any, usually provide the best evidence of its terms. However, an entitys past practice or other factors may indicate that some aspects of the substantive terms differ from the written terms. The substantive terms of a share-based payment award, as those terms are mutually understood by the entity and a party (either an employee or a nonemployee) who receives the award, provide the basis for determining the rights conveyed to a party and the obligations imposed on the issuer, regardless of how the award and related arrangement, if any, are structured. See paragraph 718-10-30-5.

1 ASC 718 refers to restricted stock (and restricted stock units) as nonvested shares (and nonvested share units). See Sections 3.3, 4.7, and 4.8 for a discussion of the differences between a nonvested share and a restricted share.

2 See Sections 1.7 and 4.13 for a discussion of exceptions for nonpublic entities to the fair-value-based measurement requirement.

2

Chapter 1 Overview

ASC 718-10

25-3 The accounting for all share-based payment transactions shall reflect the rights conveyed to the holder of the instruments and the obligations imposed on the issuer of the instruments, regardless of how those transactions are structured. For example, the rights and obligations embodied in a transfer of equity shares to an employee for a note that provides no recourse to other assets of the employee (that is, other than the shares) are substantially the same as those embodied in a grant of equity share options. Thus, that transaction shall be accounted for as a substantive grant of equity share options.

25-4 Assessment of both the rights and obligations in a share-based payment award and any related arrangement and how those rights and obligations affect the fair value of an award requires the exercise of judgment in considering the relevant facts and circumstances.

It is important for an entity to consider all of an awards terms when evaluating a share-based payment arrangement. While the written plan and agreement are generally the best evidence of the awards terms, an entitys past practice or other factors may indicate that the substantive terms differ from the written ones. For example, if an entitys award agreement indicates that the award will be settled in shares of the entitys stock, but the entity has made an oral promise to settle the award in cash or has a past practice of settling awards in cash, the substantive terms of the award would indicate that there is a cash settlement feature. The substantive terms that are mutually understood by the entity and the employee provide the basis for determining the accounting irrespective of how the award and related agreements may be drafted or structured. This concept is illustrated in ASC 718-10-25-3, which indicates that a nonrecourse note received by an entity as consideration for the issuance of stock is, in substance, the same as the grant of stock options and therefore should be accounted for as a substantive grant of stock options. Another example of this concept is a feature that allows an entity to repurchase vested shares awarded to an employee for no consideration if the employee terminates service before four years after the grant date of the awards. In this scenario, the repurchase feature functions, in substance, as a vesting condition.

1.3ScopeASC 718 generally applies to share-based payments granted to employees and, in most cases, nonemployee directors (provided that certain criteria are met). Share-based payment awards issued to nonemployees in exchange for goods or services are within the scope of ASC 505-50. There are significant differences between the guidance on nonemployee share-based payment awards and that on employee awards under ASC 718. Such differences include (1) the manner in which an entity determines the measurement date for equity-classified awards (which is the date the fair-value-based measure of the awards is determined and fixed), (2) the treatment of performance conditions, (3) the manner in which an entity recognizes the cost of the awards and the period(s) of recognition, and (4) the accounting for the awards once performance is complete (i.e., determining whether the awards are subject to other applicable GAAP). Because of these differences, it is important for an entity to consider whether the counterparty in an arrangement is an employee or a nonemployee when accounting for share-based payment awards. See Chapter 9 for a discussion of awards granted to nonemployees.

Only share-based payments that are issued in exchange for employee services are within the scope of ASC 718. Further, such payments must be either (1) settled by issuing the entitys equity shares or other equity instruments or (2) indexed, at least in part, to the value of the entitys equity shares or other equity instruments. See Chapter 2 for a more detailed discussion of the scope of ASC 718.

An entity should evaluate transactions between employees and related parties or other economic interest holders of the entity to determine whether ASC 718 applies. If a transaction is deemed to be compensation for employee services, it is accounted for as a capital contribution to the entity and as a

3

Chapter 1 Overview

share-based payment arrangement between the entity and employee. See Section 2.4 for additional guidance.

1.4RecognitionASC 718 requires compensation cost to be recognized over the requisite service period. The requisite service period is the period during which the employee is required to provide services to earn the share-based payment award. The service inception date, which is generally the grant date, is the beginning of the requisite service period. Therefore, the service inception date is the date on which an entity begins to recognize compensation cost related to the share-based payments. For awards with only a service condition, the vesting period is generally the requisite service period unless there are other substantive terms to the contrary.

The requisite service period can be explicit, implicit, or derived, depending on the awards terms and conditions:

An explicit service period is stated in the terms of an award. For example, if the award vests after four years of continuous service, the explicit service period is four years.

An implicit service period is not explicitly stated in the terms of the award but may be inferred from an analysis of those terms and other facts and circumstances that are typically associated with a performance condition. For example, if an award vests only upon the completion of a new product design and the design is expected to be completed two years from the grant date, the implicit service period is two years.

A derived service period is inferred from the application of certain techniques used to value an award with a market condition. For example, if an award becomes exercisable when the market price of the entitys stock reaches a specified level, and that specified level is expected to be achieved in three years (as inferred from the valuation technique), the derived service period is three years.

An award may contain more than one explicit, implicit, or derived service period (i.e., multiple conditions). However, it can have only one requisite service period, with the exception of a graded vesting award that is accounted for, in substance, as multiple awards; see Section 3.6.5. If an award contains multiple conditions, an entity may need to take into account the interrelationship of those conditions. Further, the entity must make an initial best estimate of the requisite service period as of the grant date, and it should revise that estimate as facts and circumstances change. Section 3.8 discusses how to account for a change in the estimated requisite service period.

Compensation cost is based on the number of awards that vest, which generally depends on satisfaction of the awards service conditions, performance conditions,3 or both. For service conditions, an entity can make an entity-wide accounting policy election to either (1) estimate the total number of awards for which the requisite service will not be rendered (i.e., estimate the forfeitures expected to occur) or (2) account for forfeitures when they occur. If the entity elects the first option, it will estimate the likelihood that employees will terminate employment before satisfying the requisite service and factor this forfeiture estimate into the amount of compensation cost accrued (i.e., decrease the quantity of awards). It will then adjust the estimated quantity if facts and circumstances change so that the total amount of compensation cost recognized at the end of the requisite service period is based on the number of awards for which the requisite service is rendered. If the entity elects the second option, it will reverse previously recognized compensation cost when an employee forfeits the award by terminating employment before the employee has satisfied the requisite service.

3 There may be certain situations in which a service or performance condition does not affect the number of awards that vest and instead affects factors other than vesting, such as the exercise price or conversion ratio.

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Chapter 1 Overview

For awards with performance conditions, an entity will need to assess the probability of meeting the performance condition and will only recognize compensation cost if it is probable that the performance condition will be met. The total compensation cost recognized will ultimately be based on the outcome of the performance condition.

If an employee forfeits an award that contains a market condition because of failure to meet the market condition but renders the requisite service, compensation cost previously recognized is not reversed. Compensation cost is only reversed if the requisite service has not been rendered, because a market condition is not considered a vesting condition. An entity takes into account the likelihood that it will meet the market condition in determining the fair-value-based measurement of the award.

See Sections 3.4 and 3.5 for additional information about service, performance, and market conditions, and see Chapter 3 for detailed guidance on recognition of compensation cost.

1.5MeasurementA share-based payment transaction with employees is measured on the basis of the fair value (or in certain situations, calculated value or intrinsic value) of the equity instrument issued. As noted in Section 1.1, ASC 718 refers to a fair-value-based method for measuring the value of the share-based payment. The fair value determined under this method is conceptually not fair value as defined in ASC 820, which explicitly excludes share-based payments from its scope. Although fair value measurement techniques are used in the fair-value-based measurement method, it specifically excludes the effects of vesting conditions and other types of features (e.g., clawback provisions) that would be included in a true fair value measurement. Therefore, when the term fair value is used in ASC 718 and in this Roadmap, it refers to a fair-value-based measurement determined in accordance with the requirements of ASC 718.

For equity-classified awards, compensation cost is recognized over the requisite service period on the basis of the fair-value-based measure of the awards on the grant date. The measurement of such awards is generally fixed on the grant date. By contrast, liability-classified awards are remeasured at their fair-value-based measurement as of each reporting date until settlement. That is, changes in the fair-value-based measure of the liability at the end of each reporting period are recognized as compensation cost, either immediately or over the requisite service period, depending on the vested status of the award. The total compensation cost ultimately recognized for liability-classified awards on the settlement date will generally equal the settlement amount (e.g., the amount of cash paid to settle the award).

Nonpublic entities can use certain practical expedients as a substitute for a fair-value-based measurement. See further discussion in Section 1.7. See Chapter 4 for additional guidance on the measurement of share-based payment awards.

1.6ClassificationAs described above, an entitys measurement of compensation cost differs depending on whether the entity has determined that share-based payment awards are classified as equity or liabilities. An overarching principle in ASC 718 is that a share-based payment arrangement cannot be classified as equity unless the employee is subject to the same risks and rewards to which other nonemployee shareholders would normally be subject for a reasonable period. Any terms and conditions that could result in cash settlement, settlement in other assets, or settlement in a variable number of shares should be carefully evaluated. In addition, indexation of share-based payments to a factor other than a service, performance, or market condition could result in liability classification. Further, all of an awards substantive terms and conditions, as well as an entitys past practices, should be assessed in the determination of whether the entity has the intent and ability to settle in shares. See Chapter 5 for a more detailed discussion of the classification of awards as either liabilities or equity.

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Chapter 1 Overview

1.7Nonpublic Entities

ASC 718-10-20 Glossary

Nonpublic EntityAny entity other than one that meets any of the following criteria:

a. Has equity securities that trade in a public market either on a stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally

b. Makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market

c. Is controlled by an entity covered by the preceding criteria.

An entity that has only debt securities trading in a public market (or that has made a filing with a regulatory agency in preparation to trade only debt securities) is a nonpublic entity.

Public Entity An entity that meets any of the following criteria:

a. Has equity securities that trade in a public market, either on a stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally

b. Makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market

c. Is controlled by an entity covered by the preceding criteria. That is, a subsidiary of a public entity is itself a public entity.

An entity that has only debt securities trading in a public market (or that has made a filing with a regulatory agency in preparation to trade only debt securities) is not a public entity.

Public Business EntityA public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.

a. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).

b. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.

c. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.

d. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.

e. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including notes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entitys filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.

Several practical expedients are available only to entities that meet the definition of a nonpublic entity in ASC 718. In determining whether it qualifies as a nonpublic entity and can therefore apply the practical expedients, an entity should note that the definition of a public entity is not the same as that of a public

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Chapter 1 Overview

business entity. While an entity uses the definitions of a public entity and a nonpublic entity to apply most of the guidance in ASC 718, it may also need to determine whether it meets the definition of a public business entity as a result of the transition provisions in ASU 2016-09 (see Appendixes A and B).

1.7.1Calculated ValueIf a nonpublic entity cannot reasonably estimate the fair value of its options and similar instruments because estimating the expected volatility of its stock price is not practicable, it may use the historical volatility of an appropriate industry sector index to calculate the value of the awards. The resulting value is referred to as calculated value. See Section 4.13.2.

1.7.2Intrinsic ValueFor liability-classified awards, a nonpublic entity can elect as an accounting policy to measure all of its liability-classified awards at either intrinsic value or fair value. Under ASU 2016-09 (see Appendixes A and B), a nonpublic entity that previously measured its liability-classified awards at fair value may make another one-time policy election as of the date it adopts the ASU to measure all liability-classified awards at intrinsic value. See Section 4.13.3 for additional information.

1.7.3Expected TermA nonpublic entity can elect, as an entity-wide accounting policy, to use a practical expedient in estimating the expected term of certain options and similar instruments. That practical expedient can only be used for awards that meet certain conditions. See Sections 4.9.2.2.3 and 4.13.1.2 for additional information.

1.7.4Transition to Public EntityA nonpublic entity that becomes a public entity can no longer use the practical expedients that are available to nonpublic entities, including calculated value and intrinsic value since public entities must use a fair-value-based measurement. In addition, the practical expedient used by nonpublic entities to determine the expected term of certain options and similar instruments is different from that used by public entities. See Section 4.13.4 for more information.

1.8Comparison With IFRSsASC 718 and ASC 505-50 are the primary sources of guidance in U.S. GAAP for employees and nonemployees, respectively, on accounting for share-based payment awards. IFRS 2 is the primary source of guidance on such awards under IFRSs. Although much of the U.S. GAAP guidance is converged with that in IFRS 2, there are some notable differences, such as the following:

Accounting for group transactions Share-based payment awards that are issued by a subsidiary to employees of the subsidiary and that are settled in the parents equity are generally classified as equity awards in the stand-alone financial statements of the subsidiary under U.S. GAAP. Such awards are classified as liability awards under IFRSs unless the subsidiary does not have an obligation to settle the awards.

Graded vesting awards Under U.S. GAAP, entities may elect, as an accounting policy, to recognize and measure graded vesting share-based payment awards (that only contain a service condition) as either a single award or as, in substance, multiple awards. Such awards may be recognized and measured only as, in substance, multiple awards under IFRSs.

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Chapter 1 Overview

Forfeitures For service conditions, an entity can make an entity-wide accounting policy election under U.S. GAAP to either (1) estimate the total number of awards for which the requisite service period will not be rendered (i.e., estimate the forfeitures expected to occur) or (2)account for forfeitures when they occur. Under IFRSs, there is no accounting policy election, and an entity is required to estimate the forfeitures expected to occur.

Classification: risks and rewards for a reasonable period Under U.S. GAAP, a share-based payment award that can be redeemed for cash at fair value is not classified as a liability if the award requires the employee to bear the risks and rewards of share ownership for a reasonable period. Such an award is often classified, at least in part, as a liability under IFRSs.

Contingent features Under U.S. GAAP, certain contingent features (i.e., clawback) of a share-based payment award are excluded from the fair-value-based measure and accounted for if and when the contingent event occurs; under IFRSs, a contingent feature is considered a nonvesting condition and included in the fair value of the award.

Modification of awards for which vesting is improbable but becomes probable Compensation cost is recognized on the basis of the modified awards fair-value-based measure as of the modification date under U.S. GAAP; under IFRSs, compensation cost is recognized on the basis of the grant-date fair value of the original award plus the incremental value of the modified award on the modification date.

Measurement of deferred taxes Under U.S. GAAP, a deferred tax asset (DTA) is recognized for tax-deductible awards on the basis of the GAAP expense recognized and adjusted only when the related tax consequence occurs (e.g., upon exercise or vesting) for tax purposes; under IFRSs, entities must use the tax deduction that would be available on the basis of current share prices as of each reporting date when measuring the DTA.

Income tax deductions Under U.S. GAAP, all recognized income tax effects, including any excess tax benefits, are recorded in the income statement; under IFRSs, any excess tax benefits are recognized when the estimated tax deduction exceeds the compensation expense recognized in the financial statements and are recorded in equity.

Nonpublic entity exceptions Under U.S. GAAP, nonpublic entities may use several practical expedients (e.g., calculated value and intrinsic value) instead of a fair-value-based measure for share-based payment awards when certain conditions are met; there are no such practical expedients under IFRSs.

Employee stock purchase plans (ESPPs) Compensation cost does not have to be recognized for ESPPs that meet certain conditions under U.S. GAAP; under IFRSs, however, compensation cost must be recognized for all share-based payment awards (including ESPPs).

See Appendix E, which contains Chapter A16, Share-based Payment, of Deloittes iGAAP publication.

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Chapter 2 Scope

2.1General

ASC 718-10

Overall Guidance15-1 The Scope Section of the Overall Subtopic establishes the pervasive scope for all Subtopics of the Compensation Stock Compensation Topic. Unless explicitly addressed within specific Subtopics, the following scope guidance applies to all Subtopics of the Compensation Stock Compensation Topic, with the exception of Subtopic 718-50, which has its own discrete scope.

Entities15-2 The guidance in the Compensation Stock Compensation Topic applies to all entities that enter into share-based payment transactions with employees.

15-3 The guidance in the Compensation Stock Compensation Topic applies to all share-based payment transactions in which an entity acquires employee services by issuing (or offering to issue) its shares, share options, or other equity instruments or by incurring liabilities to an employee that meet either of the following conditions:

a. The amounts are based, at least in part, on the price of the entitys shares or other equity instruments. (The phrase at least in part is used because an award of share-based compensation may be indexed to both the price of an entitys shares and something else that is neither the price of the entitys shares nor a market, performance, or service condition.)

b. The awards require or may require settlement by issuing the entitys equity shares or other equity instruments.

15-5 The guidance in this Topic does not apply to the following payment transactions:

a. Share-based transactions for other than employee services (see Subtopic 505-50 for guidance on those transactions).

15-6 Paragraphs 805-30-30-9 through 30-13 provide guidance on determining whether share-based payment awards issued in a business combination are part of the consideration transferred in exchange for the acquiree, and therefore in the scope of Topic 805, or are for continued service to be recognized in the postcombination period in accordance with this Topic.

15-7 The guidance in the Overall Subtopic does not apply to equity instruments held by an employee stock ownership plan.

All transactions in which an entity receives employee services in exchange for share-based instruments are within the scope of ASC 718. In such transactions, entities effectively pay employees in the form of share-based instruments for the services the employees provide. Common examples of share-based payment awards include employee stock options, stock appreciation rights, restricted stock,1 and restricted stock units.

1 ASC 718 refers to restricted stock (and restricted stock units) as nonvested shares (and nonvested share units).

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Chapter 2 Scope

ASC 718 does not apply to share-based instruments issued in exchange for cash or other assets (i.e., detachable warrants or similar instruments issued in a financing transaction) because such instruments are not issued in exchange for employee services. Other share-based transactions, or aspects of these transactions, that are not within the scope of ASC 7182 include:

Nonemployee share-based payment transactions Share-based payment transactions with nonemployees in exchange for goods or services are not within the scope of ASC 718. Such transactions are instead accounted for under other authoritative guidance, such as ASC 505-50. However, ASC 718 is applied by analogy to certain aspects of awards granted to nonemployees when there is a lack of accounting guidance under ASC 505-50 or other authoritative literature.

Equity instruments issued as consideration in a business combination ASC 718 does not address the accounting for equity instruments issued as consideration in a business combination. The measurement date for such equity instruments is described in ASC 805-30-30-7.

ASC 805 also provides guidance on determining what portion of share-based payment awards exchanged in a business combination is (1) part of the consideration transferred in a business combination or (2) related to service to be recognized in the postcombination period and therefore are within the scope of ASC 718. ASC 805-20-30-21, ASC 805-30-30-9 through 30-13, ASC 805-30-55-6 through 55-13, ASC 805-30-55-17 through 55-24, ASC 805-740-25-10 and 25-11, and ASC 805-740-45-5 and 45-6 provide guidance on share-based payment awards exchanged in connection with a business combination. See Chapter 10 for additional information.

Options or warrants issued for cash or other than for goods or services Financial instruments issued for cash or other financial instruments (i.e., other than for goods or services) are accounted for in accordance with the relevant literature on accounting for and reporting the issuance of financial instruments, such as ASC 815 and ASC 480.

Detachable options or warrants issued in a financing transaction ASC 470-20 describes how an entity should account for detachable warrants, or similar instruments, issued in a financing transaction.

Share-based awards that are granted to employees and settled in shares of an unrelated entity ASC 815-10-45-10 and ASC 815-10-55-46 through 55-48 describe the accounting for stock options that are granted to employees and indexed to and settled in publicly traded shares of an unrelated entity. See Section 2.11 for more information about the accounting for awards that are granted to employees and indexed to and settled in shares of an unrelated entity.

Only share-based payment awards that are issued in exchange for employee services are within the scope of ASC 718. Further, such awards must be either (1) settled by issuing the entitys equity shares or other equity instruments or (2) indexed, at least in part, to the value of the entitys equity shares or other equity instruments. In this context, the word indexed indicates that the value the employee receives upon settlement of the award is, at least in part, determined on the basis of the value of the entitys equity. For instance, an entity may award a cash-settled stock appreciation right that can only be settled in cash. In such circumstances, the amount of cash the employee receives upon settlement of the award is based on the relationship of the market price of the entitys equity shares to the exercise price of the award; therefore, the award is considered indexed to the entitys equity and is within the scope of ASC 718.

2 ESOPs are within the scope of ASC 718-40 and are not covered in this Roadmap. ASC 718-10-20 defines an ESOP as an employee benefit plan that is described by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 as a stock bonus plan, or combination stock bonus and money purchase pension plan, designed to invest primarily in employer stock. Also called an employee share ownership plan. Entities should continue to account for ESOPs in accordance with ASC 718-40 or SOP 76-3. Although SOP 76-3 was not included in the Codification, entities may continue to apply it to shares acquired by ESOPs on or before December 31, 1992.

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Chapter 2 Scope

Example 2-1

Entity A, a public entity, offers a long-term incentive plan (LTIP) to certain of its employees. At the beginning of each year, a target cash bonus based on a specific dollar amount is established for each employee. Each employee in the LTIP will receive a predetermined percentage of his or her target bonus at the end of three years on the basis of the total return on As stock price relative to that of its competitors over the three-year performance period. The return on As stock price is ranked with that of its competitors from the highest to the lowest performer. On the basis of As ranking, each employee will receive a percentage of his or her target bonus that increases or decreases as As ranking increases or decreases.

For example, at the beginning of the three-year performance period, A sets a target cash bonus of $100,000 for an employee. Entity A includes nine of its competitors in its peer group to establish a ranking. Depending on the ranking, the employee will receive a percentage that ranges from 0 percent to 200 percent of the target bonus. For instance, if A ranks first in stock price return, the employee will receive 200 percent of $100,000, or $200,000; if A ranks fifth, the employee will receive 100 percent of $100,000, or $100,000; and if A ranks tenth or last, the employee will not receive a bonus.

Because the bonus is settled only in cash, As obligation under the LTIP is classified as a share-based liability. The liability is based, in part, on the price of As shares. That is, the share-based liability is based on the return on As stock price relative to the returns on the stock prices of As competitors. While the bonuses to be paid are not linearly correlated to the return on As stock price, the amount of the bonus does depend on the return on As stock price relative to that of its competitors. Accordingly, the LTIP is within the scope of, and therefore is accounted for in accordance with, ASC 718. Under ASC 718-30-35-3, A shall measure a liability award under a share-based payment arrangement based on the awards fair value remeasured at each reporting date until the date of settlement.

Informal discussions with the FASB staff support the conclusion that LTIPs can be within the scope of ASC 718.

If an award offers an employee a fixed monetary amount that is settled in a variable number of an entitys shares, the amount the employee receives upon settlement of the award is not based on the value of the entitys equity and therefore is not considered indexed to the entitys own equity. However, the fixed monetary amount will be settled by issuing a variable number of the entitys shares. Because the award is settled by issuing the entitys own equity, the award is within the scope of ASC 718.

Example 2-2

An entity sets a bonus of $100,000 for its chief executive if the executive remains employed for a two-year period. The bonus will be settled by issuing enough equity shares whose value equals $100,000. Therefore, if the entitys share price is $50 at the end of the second year, the entity will settle the bonus by issuing 2,000 ($100,000 bonus $50 share price) of the entitys equity shares. This bonus award is within the scope of ASC 718 because it is settled by issuing the entitys own equity.

Share-based payment awards that are indexed to or settled in something other than an entitys shares may be within the scope of ASC 718. ASC 718-10-20 defines share-based payment arrangements, in part, as follows:

The term shares [in ASC 718-10-15-3] includes various forms of ownership interest that may not take the legal form of securities (for example, partnership interests), as well as other interests, including those that are liabilities in substance but not in form. Equity shares refers only to shares that are accounted for as equity.

That is, the legal form of the entitys award does not preclude it from being within the scope of ASC 718. In this context, the term shares broadly represents instruments that entitle the holder to share in the risks and rewards of the entity as an owner.

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Chapter 2 Scope

Example 2-3

Trust Unit RightsAn entity may grant its employees trust unit rights to purchase a unit in a unit investment trust at a reduced exercise price. Upon exercise of the unit right, the holder receives publicly traded trust units, which are equal fractional undivided interests in the trust. The trust units are the only voting, participating equity securities of the trust. The trust structure is created to purchase and hold a fixed portfolio of securities or other assets, which represent the trust portfolio. The trust then distributes the income generated from the portfolio to the holders of the trust units. Therefore, owning a trust unit allows the holder to share in the appreciation of the trust portfolio. Common examples of this type of investment trust structure include mutual funds and real estate investment trusts.

While the entity is offering to issue unit rights, which are not legal securities themselves, the rights entitle the holder to trust units. Although these trust units are not shares in the strictest sense, they provide the holder with the risks and rewards of the entity as an owner (e.g., voting rights). Accordingly, this arrangement is within the scope of ASC 718.

Example 2-4

Phantom Stock PlansUnder a typical phantom stock plan, an employee is granted a theoretical number of units that are exercisable into common stock of the entity. These units are not legal securities themselves and usually are issued only on a memorandum basis. The units do not have voting rights with the common stockholders. The value of each phantom unit is based on the value of the entitys stock and, therefore, appreciates and depreciates on the basis of fluctuations in the value of the entitys stock.

The phantom stock unit holders do not have the same rights as a common stockholder (i.e., voting rights). However, because the phantom units are indexed to and settled in the entitys equity, this arrangement is within the scope of ASC 718.

2.2Definition of Employee

ASC 718-10-20 Glossary

EmployeeAn individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (IRS) Revenue Ruling 87-41. A reporting entity based in a foreign jurisdiction would determine whether an employee-employer relationship exists based on the pertinent laws of that jurisdiction. Accordingly, a grantee meets the definition of an employee if the grantor consistently represents that individual to be an employee under common law. The definition of an employee for payroll tax purposes under the U.S. Internal Revenue Code includes common law employees. Accordingly, a grantor that classifies a grantee potentially subject to U.S. payroll taxes as an employee also must represent that individual as an employee for payroll tax purposes (unless the grantee is a leased employee as described below). A grantee does not meet the definition of an employee solely because the grantor represents that individual as an employee for some, but not all, purposes. For example, a requirement or decision to classify a grantee as an employee for U.S. payroll tax purposes does not, by itself, indicate that the grantee is an employee because the grantee also must be an employee of the grantor under common law.

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Chapter 2 Scope

ASC 718-10-20 Glossary (continued)

A leased individual is deemed to be an employee of the lessee if all of the following requirements are met:

a. The leased individual qualifies as a common law employee of the lessee, and the lessor is contractually required to remit payroll taxes on the compensation paid to the leased individual for the services provided to the lessee.

b. The lessor and lessee agree in writing to all of the following conditions related to the leased individual: 1. The lessee has the exclusive right to grant stock compensation to the individual for the employee

service to the lessee. 2. The lessee has a right to hire, fire, and control the activities of the individual. (The lessor also may

have that right.) 3. The lessee has the exclusive right to determine the economic value of the services performed by the

individual (including wages and the number of units and value of stock compensation granted).4. The individual has the ability to participate in the lessees employee benefit plans, if any, on the same

basis as other comparable employees of the lessee. 5. The lessee agrees to and remits to the lessor funds sufficient to cover the complete compensation,

including all payroll taxes, of the individual on or before a contractually agreed upon date or dates.

A nonemployee director does not satisfy this definition of employee. Nevertheless, nonemployee directors acting in their role as members of a board of directors are treated as employees if those directors were elected by the employers shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards granted to nonemployee directors for their services as directors. Awards granted to those individuals for other services shall be accounted for as awards to nonemployees.

ASC 718-10

Identifying an Employee of a Physician Practice Management Entity55-85A A physician practice management entity shall determine whether an employee of the physician practice is considered an employee of the physician practice management entity for purposes of determining the method of accounting for that persons share-based compensation as follows:

a. An employee of a physician practice that is consolidated by the physician practice management entity shall be considered an employee of the physician practice management entity and its subsidiaries.

b. An employee of a physician practice that is not consolidated by the physician practice management entity shall not be considered an employee of the physician practice management entity and its subsidiaries.

Determining whether a grantee meets the definition of an employee under ASC 718 is important to the accounting for a share-based payment award. On the basis of an examination of cases and rules, the IRS issued Revenue Ruling 87-41, which establishes 20 criteria for determining whether an individual is an employee under common law. The degree of importance of each criterion varies depending on the context in which the services of an individual are performed. In addition, the criteria are designed as guides to help an entity determine whether an individual is an employee. An entity should ensure that the substance of an arrangement is not obscured by attempts to achieve a particular employment status. The criteria include the following:

Instructions A worker who is required to comply with other persons instructions about when, where, and how he or she is to work is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the RIGHT to require compliance with instructions.

http://www.michigan.gov/documents/wca/wca_irs_revenue_ruling_87-41_390318_7.pdf

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Continuing relationship A continuing relationship between the worker and the person or persons for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals.

Set hours of work The establishment of set hours of work by the person or persons for whom the services are performed is a factor indicating control.

Hiring, supervising, and paying assistants If the person or persons for whom the services are performed hire, supervise, and pay assistants, that factor generally shows control over the workers on the job. However, if one worker hires, supervises, and pays the other assistants pursuant to a contract under which the worker agrees to provide materials and labor and under which the worker is responsible only for the attainment of a result, this factor indicates an independent contractor status.

Working on the employers premises If the work is performed on the premises of the person or persons for whom the services are performed, that factor suggests control over the worker, especially if the work could be done elsewhere. Work done off the premises of the person or persons receiving the services, such as at the office of the worker, indicates some freedom from control. However, this fact by itself does not mean that the worker is not an employee. The importance of this factor depends on the nature of the service involved and the extent to which an employer generally would require that employees perform such services on the employers premises. Control over the place of work is indicated when the person or persons for whom the services are performed have the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required.

Full-time employment requirement If the worker must devote substantially full time to the business of the person or persons for whom the services are performed, such person or persons have control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work. An independent contractor on the other hand, is free to work when and for whom he or she chooses.

Payment Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.

See IRS Revenue Ruling 87-41 for additional information about assessing whether an individual is an employee under common law.

2.3Nonemployee Directors

ASC 718-10

Example 2: Definition of Employee55-89 This Example illustrates the evaluation as to whether an individual meets conditions to be considered an employee under the definition of that term used in this Topic.

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ASC 718-10 (continued)

55-90 This Topic defines employee as an individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (IRS) Revenue Ruling 87-41. An example of whether that condition exists follows. Entity A issues options to members of its Advisory Board, which is separate and distinct from Entity As board of directors. Members of the Advisory Board are knowledgeable about Entity As industry and advise Entity A on matters such as policy development, strategic planning, and product development. The Advisory Board members are appointed for two-year terms and meet four times a year for one day, receiving a fixed number of options for services rendered at each meeting. Based on an evaluation of the relationship between Entity A and the Advisory Board members, Entity A concludes that the Advisory Board members do not meet the common law definition of employee. Accordingly, the awards to the Advisory Board members are accounted for as awards to nonemployees under the provisions of this Topic.

55-91 Nonemployee directors acting in their role as members of an entitys board of directors shall be treated as employees if those directors were elected by the entitys shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards granted to them for their services as directors. Awards granted to those individuals for other services shall be accounted for as awards to nonemployees in accordance with Section 505-50-25. Additionally, consolidated groups may have multiple boards of directors; this guidance applies only to either of the following:

a. The nonemployee directors acting in their role as members of a parent entitys board of directors b. Nonemployee members of a consolidated subsidiarys board of directors to the extent that those

members are elected by shareholders that are not controlled directly or indirectly by the parent or another member of the consolidated group.

Under an exception in ASC 718, a member of an entitys board of directors who may not meet the common law definition of an employee may be treated as an employee if certain conditions are met.

2.3.1Parent-Entity DirectorsA nonemployee member of a parent entitys board of directors will be treated as an employee if (1) the director was elected by the entitys shareholders or (2) the board position will be subject to shareholder election upon expiration of the directors term.

2.3.2Subsidiary DirectorsAn outside member of a subsidiarys board of directors who is granted awards will be treated as an employee in the parents consolidated financial statements if the individual is granted awards for services as a member of the parent companys board of directors (and meets one of the conditions described in Section 2.3.1 above).

Further, nonemployee members of a consolidated subsidiarys board of directors that are granted awards for their director services will be considered employees under ASC 718 if they were elected by minority shareholders who are not directly or indirectly controlled by the parent or another member of the consolidated group. Such awards are accounted for under ASC 718 in the parent companys consolidated financial statements and in the separate financial statements of the subsidiary. If the directors were not elected by minority shareholders of the subsidiary (i.e., they were elected by the controlling shareholders or another member of the consolidated group), the awards should be accounted for under the ASC 505 nonemployee model in the parent companys consolidated financial statements. However, if they were elected by the subsidiarys shareholders, including controlling shareholders of the consolidated group, the awards granted for director services should be accounted for as awards granted to employees under ASC 718 in the separate financial statements of the subsidiary.

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Chapter 2 Scope

2.4Nonemployee Awards

SEC Staff Accounting Bulletins

SAB Topic 14.A, Share-Based Payment Transactions With Nonemployees [Excerpt; Reproduced in ASC 718-10-S99-1] Question: Are share-based payment transactions with nonemployees included in the scope of FASB ASC Topic 718?

Interpretive Response: Only certain aspects of the accounting for share-based payment transactions with nonemployees are explicitly addressed by FASB ASC Topic 718. This Topic explicitly:

Establishes fair value as the measurement objective in accounting for all share-based payments;4 and Requires that an entity record the value of a transaction with a nonemployee based on the more reliably

measurable fair value of either the good or service received or the equity instrument issued.5

FASB ASC Topic 718 does not supersede any of the authoritative literature that specifically addresses accounting for share-based payments with nonemployees. For example, FASB ASC Topic 718 does not specify the measurement date for share-based payment transactions with nonemployees when the measurement of the transaction is based on the fair value of the equity instruments issued.6 For determining the measurement date of equity instruments issued in share-based transactions with nonemployees, a company should refer to FASB ASC Subtopic 505-50, Equity Equity-Based Payments to Non-Employees.

With respect to questions regarding nonemployee arrangements that are not specifically addressed in other authoritative literature, the staff believes that the application of guidance in FASB ASC Topic 718 would generally result in relevant and reliable financial statement information. As such, the staff believes it would generally be appropriate for entities to apply the guidance in FASB ASC Topic 718 by analogy to share-based payment transactions with nonemployees unless other authoritative accounting literature more clearly addresses the appropriate accounting, or the application of the guidance in FASB ASC Topic 718 would be inconsistent with the terms of the instrument issued to a nonemployee in a share-based payment arrangement. [Footnote omitted] For example, the staff believes the guidance in FASB ASC Topic 718 on certain transactions with related parties or other holders of an economic interest in the entity would generally be applicable to share-based payment transactions with nonemployees. The staff encourages registrants that have additional questions related to accounting for share-based payment transactions with nonemployees to discuss those questions with the staff.4 FASB ASC paragraph 718-10-30-2.5 Ibid.6 [Original footnote removed by SAB 114.]

ASC 718 applies to share-based payment awards granted to employees and, when appropriate, to nonemployees. Examples of provisions of ASC 718 that apply equally to employee and nonemployee awards include, but are not limited to, the following:

The accounting for modifications to the terms of previously issued awards. See Section 9.6 for a discussion of the accounting for the modification of share-based payment awards issued to nonemployees.

The accounting for the income tax effects of awards.However, one notable difference between the accounting for nonemployee awards and that for employee awards is related to the awards measurement date. Entities should apply ASC 505-50-30 to determine the measurement date for awards issued to nonemployees. ASC 505-50-30-11 indicates that the measurement date of a nonemployee award is the earlier of (1) the performance commitment date or (2) the date on which the counterpartys performance is complete.

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Chapter 2 Scope

ASC 505-50-30-12 elaborates on the term performance commitment, stating, in part:

A performance commitment is a commitment under which performance by the counterparty to earn the equity instruments is probable because of sufficiently large disincentives for nonperformance. The disincentives must result from the relationship between the issuer and the counterparty. Forfeiture of the equity instruments as the sole remedy in the event of the counterpartys nonperformance is not considered a sufficiently large disincentive for purposes of applying this guidance.

The determination of whether a performance commitment contains a sufficiently large disincentive for nonperformance depends on the circumstances of the individual arrangement. (See Section 9.3.2.1 for more information about what is considered a sufficiently large disincentive for nonperformance.)

By contrast, the date on which the counterpartys performance is complete represents the date when the entity receives and the counterparty has delivered or rendered the goods or services in exchange for the award.

The measurement date for nonemployee awards is similar to the grant date for employee awards because the fair-value-based measure of the awards is not fixed until that time. Furthermore, ASC 505-50-30-21 indicates that if it is appropriate for an issuer to recognize some or all of the cost of the award under U.S. GAAP before the measurement date, the issuer would remeasure the award as of the end of each reporting period at its fair-value-based measure. This accounting is the same as that for an employee award whose service inception date precedes the grant date. In addition, unlike employee awards, nonemployee awards with performance conditions are measured at their lowest aggregate fair-value-based measure (i.e., probability is not considered) until the performance conditions are met.

Further, while ASC 505-50 does not specifically address either the period(s) or the manner (i.e., capitalize versus expense) in which cost associated with awards issued to nonemployees for goods or services must be recognized, ASC 505-50-25-4 states that entities are required to use the same period(s) and the same method they would use if the entity issuing the awards had paid cash for the goods or services.

See Chapter 9 for additional information on accounting for nonemployee awards.

2.5Economic Interest Holders

ASC 718-10

15-4 Share-based payments awarded to an employee of the reporting entity by a related party or other holder of an economic interest in the entity as compensation for services provided to the entity are share-based payment transactions to be accounted for under this Topic unless the transfer is clearly for a purpose other than compensation for services to the reporting entity. The substance of such a transaction is that the economic interest holder makes a capital contribution to the reporting entity, and that entity makes a share-based payment to its employee in exchange for services rendered. An example of a situation in which such a transfer is not compensation is a transfer to settle an obligation of the economic interest holder to the employee that is unrelated to employment by the entity.

ASC 718-10-20 Glossary

Economic Interest in an EntityAny type or form of pecuniary interest or arrangement that an entity could issue or be a party to, including equity securities; financial instruments with characteristics of equity, liabilities, or both; long-term debt and other debt-financing arrangements; leases; and contractual arrangements such as management contracts, service contracts, or intellectual property licenses.

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Chapter 2 Scope

An economic interest holder of an entity may issue share-based payment awards to employees of the entity. In that circumstance, the entity typically records the transaction as if it had issued the awards since the entity benefits from compensation paid to its employees.

On occasion, investors intending to increase their stake in an emerging nonpublic entity may purchase shares from the founders of the nonpublic entity or other individuals who are also considered employees. The presumption in such transactions is that any consideration in excess of the fair value of the shares is compensation paid to employees. However, if there is sufficient evidence that a transaction is an arms-length fair value transaction, it may be necessary to treat the transaction as a data point in the estimation of the fair-value-based measurement of share-based payment awards. See Section 4.12.3.2 for more information.

2.6Profits InterestsNonpublic entities (often limited partnerships or limited liability companies) may grant special classes of equity, frequently referred to as profits interests. In many cases, a waterfall calculation is used to determine the payout to the different classes of shares or units. While arrangements vary, the waterfall calculation often is performed to allocate distributions and proceeds to the profits interests only after specified amounts (e.g., multiple of invested capital) or specified returns (e.g., internal rate of return on invested capital) are first allocated to the other classes of equity. In certain cases, distributions on and realization of value from profits interests are expected only from the proceeds from a liquidity event such as a sale or IPO of the entity, provided that the sale or IPO exceeds a target hurdle rate.

While the legal and economic form of these awards can vary, they should be accounted for on the basis of their substance. If an award has the characteristics of an equity interest, it represents a substantive class of equity and should be accounted for under ASC 718; however, an award that is, in substance, a performance bonus or a profit-sharing arrangement would be accounted for as such, typically in accordance with ASC 710.

In a speech at the December 2006 AICPA Conference on Current SEC and PCAOB Developments, Joseph Ucuzoglu, then a professional accounting fellow in the SECs Office of the Chief Accountant, discussed observations of the SEC staff related to special classes of equity and associated financial reporting considerations. Specifically, he stated:

Public companies often create special classes of stock to more closely align the compensation of an employee with the operating performance of a portion of the business with which he or she has oversight responsibility. That is, rather than granting an equity interest in the parent company, employees are granted instruments whose value is based predominantly on the operations of a particular subset of the parents operations. The staff has observed the use of these arrangements in diverse industries, ranging from the grant of an interest in a group of restaurants that an employee oversees, to the grant of an interest in a particular investment fund that an employee manages.

Similarly, pre-IPO companies often create special classes of stock to provide employees with an opportunity to participate in any appreciation realized through a future initial public offering or sale of the company, with limited opportunity for gain if no liquidity event occurs. In order to accomplish this objective, the special class is often subordinate in both dividend rights and liquidation preference to the compa