5.3 Share-Based Compensation Granted by an Investor to Employees or Nonemployees of an Equity Method Investee
ASC 323-10
Share-Based Compensation
Granted to Employees and Nonemployees of an Equity
Method Investee
25-3 Paragraphs 323-10-25-4 through
25-6 provide guidance on accounting for share-based payment
awards granted by an investor to employees or nonemployees
of an equity method investee that provide goods or services
to the investee that are used or consumed in the investee’s
operations when no proportionate funding by the other
investors occurs and the investor does not receive any
increase in the investor’s relative ownership percentage of
the investee. That guidance assumes that the investor’s
grant of share-based payment awards to employees or
nonemployees of the equity method investee was not agreed to
in connection with the investor’s acquisition of an interest
in the investee. That guidance applies to share-based
payment awards granted to employees or nonemployees of an
investee by an investor based on that investor’s stock (that
is, stock of the investor or other equity instruments
indexed to, and potentially settled in, stock of the
investor).
25-4 In the circumstances described
in paragraph 323-10-25-3, a contributing investor shall
expense the cost of share-based payment awards granted to
employees and nonemployees of an equity method investee as
incurred (that is, in the same period the costs are
recognized by the investee) to the extent that the
investor’s claim on the investee’s book value has not been
increased.
25-5 In the circumstances described
in paragraph 323-10-25-3, other equity method investors in
an investee (that is, noncontributing investors) shall
recognize income equal to the amount that their interest in
the investee’s net book value has increased (that is, their
percentage share of the contributed capital recognized by
the investee) as a result of the disproportionate funding of
the compensation costs. Further, those other equity method
investors shall recognize their percentage share of earnings
or losses in the investee (inclusive of any expense
recognized by the investee for the share-based compensation
funded on its behalf).
25-6 Example 2 (see paragraph
323-10-55-19) illustrates the application of this guidance
for share-based compensation granted to employees of an
equity method investee.
Share-Based Compensation Granted to Employees and
Nonemployees of an Equity Method Investee
30-3 Share-based compensation cost
recognized in accordance with paragraph 323-10-25-4 shall be
measured initially at fair value in accordance with Topic
718. Example 2 (see paragraph 323-10-55-19) illustrates the
application of this guidance.
ASC 505-10
25-3 Paragraphs
323-10-25-3 through 25-5 provide guidance on accounting for
share-based compensation granted by an investor to employees
or nonemployees of an equity method investee that provide
goods or services to the investee that are used or consumed
in the investee’s operations. An investee shall recognize
the costs of the share-based payment incurred by the
investor on its behalf, and a corresponding capital
contribution, as the costs are incurred on its behalf (that
is, in the same period(s) as if the investor had paid cash
to employees and nonemployees of the investee following the
guidance in Topic 718 on stock compensation.
ASC 323-10 — SEC Materials — SEC Staff
Guidance
SEC Observer Comment:
Accounting by an Investor for Stock-Based Compensation
Granted to Employees of an Equity Method
Investee
S99-4 The following is the text of
SEC Observer Comment: Accounting by an Investor for
Stock-Based Compensation Granted to Employees of an Equity
Method Investee.
Paragraph 323-10-25-3
provides guidance on the accounting by an investor for
stock-based compensation based on the investor’s stock
granted to employees of an equity method investee. Investors
that are SEC registrants should classify any income or
expense resulting from application of this guidance in the
same income statement caption as the equity in earnings (or
losses) of the investee.
Share-based payment awards may be (1) issued by an equity method investor to
employees or nonemployees of an equity method investee and (2) indexed to, or settled in, the equity of the investor. If such awards are issued to employees of an equity method investee and are indexed to, or settled in, the equity of the investor, the awards are not within the scope of ASC 718. This conclusion is supported by analogy to paragraph 10 of FASB Interpretation 44. While the guidance in Interpretation 44 was nullified by FASB Statement 123(R), the conclusion in paragraph 10 of Interpretation 44 remains applicable by analogy since it is the only available guidance on this issue. Paragraph 10 of Interpretation 44 states, in
part:
[Opinion No. 25] does not apply to the accounting by a
grantor for stock compensation granted to nonemployees. For example, Opinion 25
does not apply to the accounting by a corporate investor of an unconsolidated
investee (or a joint venture owner) for stock options or awards granted by the
investor (owner) to employees of the investee (joint venture) accounted for
under the equity method because the grantees are not employees of the
grantor.
However, since neither Interpretation 44 nor ASC 718 specifically addresses the
accounting for these awards, an entity must account for them under other guidance.
Such guidance includes ASC 323-10-25-3 through 25-5 and ASC 505-10-25-3, which
address the accounting related to the financial statements of the equity method
investor, the equity method investee, and the noncontributing investor(s). This
guidance does not apply to share-based payment awards issued to grantees for goods
or services provided to the investor that are indexed to, or settled in, the equity
of the investee (as opposed to the equity of the investor). See Section 2.11 of Deloitte’s Roadmap Share-Based Payment Awards for further
guidance on the accounting for awards that are issued to grantees and indexed to,
and settled in, shares of an unrelated entity.
Example 2 in ASC 323-10-55-19
through 55-26 illustrates the accounting for stock compensation granted by an
investor to employees of an equity method investee:
ASC 323-10
Example 2:
Share-Based Compensation Granted to Employees of an
Equity Method Investee
55-19 This Example illustrates the
guidance in paragraphs 323-10-25-3 and 323-10-30-3 for
share-based compensation by an investor granted to employees
of an equity method investee. This Example is equally
applicable to share-based awards granted by an investor to
nonemployees that provide goods or services to an equity
method investee that are used or consumed in the investee’s
operations.
55-20 Entity A owns a 40 percent
interest in Entity B and accounts for its investment under
the equity method. On January 1, 20X1, Entity A grants
10,000 stock options (in the stock of Entity A) to employees
of Entity B. The stock options cliff-vest in three years. If
an employee of Entity B fails to vest in a stock option, the
option is returned to Entity A (that is, Entity B does not
retain the underlying stock). The owners of the remaining 60
percent interest in Entity B have not shared in the funding
of the stock options granted to employees of Entity B on any
basis and Entity A was not obligated to grant the stock
options under any preexisting agreement with Entity B or the
other investors. Entity B will capitalize the share-based
compensation costs recognized over the first year of the
three-year vesting period as part of the cost of an
internally constructed fixed asset (the internally
constructed fixed asset will be completed on December 31,
20X1).
55-21 Before granting the stock
options, Entity A’s investment balance is $800,000, and the
book value of Entity B’s net assets equals $2,000,000.
Entity B will not begin depreciating the internally
constructed fixed asset until it is complete and ready for
its intended use and, therefore, no related depreciation
expense (or compensation expense relating to the stock
options) will be recognized between January 1, 20X1, and
December 31, 20X1. For the years ending December 31, 20X2,
and December 31, 20X3, Entity B will recognize depreciation
expense (on the internally constructed fixed asset) and
compensation expense (for the cost of the stock options
relating to Years 2 and 3 of the vesting period). After
recognizing those expenses, Entity B has net income of
$200,000 for the fiscal years ending December 31, 20X1,
December 31, 20X2, and December 31, 20X3.
55-22 Entity C also owns a 40
percent interest in Entity B. On January 1, 20X1, before
granting the stock options, Entity C’s investment balance is
$800,000.
55-23 Assume that the fair value of
the stock options granted by Entity A to employees of Entity
B is $120,000 on January 1, 20X1. Under Topic 718, the fair
value of share-based compensation should be measured at the
grant date. This Example assumes that the stock options
issued are classified as equity and ignores the effect of
forfeitures.
55-25 A rollforward of Entity B’s
net assets and a reconciliation to Entity A’s and Entity C’s
ending investment accounts follows.
55-26 A summary of the calculation
of share-based compensation cost by year follows.
5.3.1 Accounting in the Financial Statements of the Contributing Investor Issuing the Awards
ASC 323-10-25-3 and 25-4 indicate that an investor should recognize (1) the
entire cost (not just the portion of the cost associated with the investor’s
ownership interest) of the share-based payment awards granted to employees of an
investee as an expense and (2) a corresponding amount recognized in the
investor’s equity. However, the cost associated with the investor’s ownership
interest will be recognized as an expense when it records its share of the
investee’s earnings (because its share of the investee’s earnings includes the
awards’ expense). In addition, the entire cost (and corresponding equity) should
be recorded as incurred (i.e., in the same period(s) as if the investor had paid
cash to the investee’s employees). The cost of the share-based payment awards is
a fair-value-based amount that is consistent with the definition of such cost
under ASC 718. As noted in ASC 323-10-S99-4, “[i]nvestors that are SEC
registrants should classify any income or expense resulting from application of
this guidance in the same income statement caption as the equity in earnings (or
losses) of the investee.” Although ASC 323-10-S99-4 refers to SEC registrants,
reporting entities that are not SEC registrants should consider applying the
same guidance.
5.3.2 Accounting in the Financial Statements of the Investee Receiving the Awards
ASC 505-10-25-3 indicates that an investee should recognize (1) the entire cost
of the share-based payment awards incurred by an investor on the investee’s
behalf as compensation cost and (2) a corresponding amount as a capital
contribution. The cost of the share-based payment awards is a fair-value-based
amount that is consistent with the definition of such cost in ASC 718. In
addition, the compensation cost (and corresponding capital contribution) should
be recorded as incurred (i.e., in the same period(s) as if the investor had paid
cash to the investee’s employees).
5.3.3 Accounting in the Financial Statements of the Noncontributing Investors
ASC 323-10-25-5 states that the noncontributing investors “shall recognize
income equal to the amount that their interest in the investee’s net book value
has increased (that is, their percentage share of the contributed capital
recognized by the investee)” as a result of the capital contribution by the
investor issuing the awards. In addition, the noncontributing investors “shall
recognize their percentage share of earnings or losses in the investee
(inclusive of any expense recognized by the investee for the share-based
compensation funded on its behalf).” That is, the noncontributing investors
should recognize their share of the investee’s earnings or losses (including the
compensation cost recognized for the share-based payment awards issued by the
equity method investor) in accordance with ASC 323-10. As noted in ASC
323-10-S99-4, “[i]nvestors that are SEC registrants should classify any income
or expense resulting from application of this guidance in the same income
statement caption as the equity in earnings (or losses) of the investee.”
Although ASC 323-10-S99-4 references SEC registrants, reporting entities that
are not SEC registrants should consider applying the same guidance.
5.3.4 Stock-Based Compensation Granted by an Investor to Employees of an Equity Method Investee When the Investee Reimburses the Contributing Investor
If an investee reimburses a contributing investor for share-based payment awards, the contributing
investor generally records income, with a corresponding amount recorded in equity, in the same periods
as the cost that is recognized for issuing the awards. Therefore, the issuance of the awards by the
contributing investor and the subsequent reimbursement by the investee may not affect the net income
(loss) of the contributing investor. That is, if the reimbursement received by the investor equals the
compensation cost recognized for the awards granted, the cost of issuing the awards and the income
for their reimbursement will be equal and offsetting and will be recorded in the same reporting periods
in the contributing investor’s income statement.
If an investee reimburses a contributing investor for share-based payment awards, the investee
generally accrues a dividend to the contributing investor for the amount of the reimbursement in the
same periods as the capital contribution from the contributing investor. The recognition of a dividend is
generally appropriate given that the issuance of the awards resulted in a capital contribution from the
contributing investor. See Section 5.3.2 for a more detailed discussion of the accounting by the investee
related to the awards.
If an investee reimburses a contributing investor for share-based payment awards, the noncontributing
investor or investors generally recognize a loss equal to the amount by which their interest in the
investee’s net book value has decreased (i.e., their percentage share of the distributed capital
recognized by the investee) as a result of the reimbursement to the contributing investor. The
recognition of a loss by the noncontributing investor is typically appropriate given that its interest in
the investee’s net book value has decreased as a result of the reimbursement provided to the investor
issuing the awards.
Under U.S. GAAP, there is no explicit guidance on the accounting for an
arrangement in which the investee reimburses the contributing investor;
therefore, other views may be acceptable for the accounting by the contributing
investor, the investee, and the noncontributing investor.