Appendix B — Glossary of Selected Terms
Selected glossary terms from ASC 718-10-20 and the ASC master glossary
are reproduced below.
ASC 718-10 Glossary and ASC Master Glossary
Award
The collective noun for multiple instruments with the same terms
and conditions granted at the same time either to a single
grantee or to a group of grantees. An award may specify multiple
vesting dates, referred to as graded vesting, and different
parts of an award may have different expected terms. References
to an award also apply to a portion of an award.
Blackout Period
A period of time during which exercise of an equity share option
is contractually or legally prohibited.
Broker-Assisted Cashless Exercise
The simultaneous exercise by a grantee of a share option and sale
of the shares through a broker (commonly referred to as a
broker-assisted exercise).
Generally, under this method of exercise:
- The grantee authorizes the exercise of an option and the immediate sale of the option shares in the open market.
- On the same day, the entity notifies the broker of the sale order.
- The broker executes the sale and notifies the entity of the sales price.
- The entity determines the minimum statutory tax-withholding requirements.
- By the settlement day (generally three days later), the entity delivers the stock certificates to the broker.
- On the settlement day, the broker makes payment to the entity for the exercise price and the minimum statutory withholding taxes and remits the balance of the net sales proceeds to the grantee.
Call Option
A contract that allows the holder to buy a specified quantity of
stock from the writer of the contract at a fixed price for a
given period.
Combination Award
An award with two or more separate components, each of which can
be separately exercised. Each component of the award is actually
a separate award, and compensation cost is measured and
recognized for each component.
Customer
A party that has contracted with an entity to obtain goods or
services that are an output of the entity’s ordinary activities
in exchange for consideration.
Derived Service Period
A service period for an award with a market condition that is
inferred from the application of certain valuation techniques
used to estimate fair value. For example, the derived service
period for an award of share options that the employee can
exercise only if the share price increases by 25 percent at any
time during a 5-year period can be inferred from certain
valuation techniques. In a lattice model, that derived service
period represents the duration of the median of the distribution
of share price paths on which the market condition is satisfied.
That median is the middle share price path (the midpoint of the
distribution of paths) on which the market condition is
satisfied. The duration is the period of time from the service
inception date to the expected date of satisfaction (as inferred
from the valuation technique). If the derived service period is
three years, the estimated requisite service period is three
years and all compensation cost would be recognized over that
period, unless the market condition was satisfied at an earlier
date. Compensation cost would not be recognized beyond three
years even if after the grant date the entity determines that it
is not probable that the
market condition will be satisfied within that period. Further,
an award of fully vested, deep out-of-the-money share options
has a derived service period that must be determined from the
valuation techniques used to estimate fair value. See Explicit Service Period,
Implicit Service
Period, and Requisite
Service Period.
Economic Interest in an Entity
Any 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.
Employee
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. 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.
A leased individual is deemed to be an employee of the lessee if
all of the following requirements are met:
- 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.
- The lessor and lessee agree in writing to all of the
following conditions related to the leased
individual:
- The lessee has the exclusive right to grant stock compensation to the individual for the employee service to the lessee.
- The lessee has a right to hire, fire, and control the activities of the individual. (The lessor also may have that right.)
- 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).
- The individual has the ability to participate in the lessee’s employee benefit plans, if any, on the same basis as other comparable employees of the lessee.
- 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 employer’s 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.
Employee Stock Ownership Plan
An employee stock ownership plan is 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.
Equity Restructuring
A nonreciprocal transaction between an entity and its
shareholders that causes the per-share fair value of the shares
underlying an option or similar award to change, such as a stock
dividend, stock split, spinoff, rights offering, or
recapitalization through a large, nonrecurring cash
dividend.
Explicit Service Period
A service period that is explicitly stated in the terms of a
share-based payment award. For example, an award stating that it
vests after three years of continuous employee service from a
given date (usually the grant date) has an explicit service
period of three years. See Derived
Service Period, Implicit Service Period, and Requisite Service Period.
Fair Value
The amount at which an asset (or liability) could be bought (or
incurred) or sold (or settled) in a current transaction between
willing parties, that is, other than in a forced or liquidation
sale.
Freestanding Financial Instrument
A financial instrument that meets either of the following
conditions:
- It is entered into separately and apart from any of the entity’s other financial instruments or equity transactions.
- It is entered into in conjunction with some other transaction and is legally detachable and separately exercisable.
Grant Date
The date at which a grantor and a grantee reach a mutual
understanding of the key terms and conditions of a share-based
payment award. The grantor becomes contingently obligated on the
grant date to issue equity instruments or transfer assets to a
grantee who delivers goods or renders services or purchases
goods or services as a customer. Awards made under an
arrangement that is subject to shareholder approval are not
deemed to be granted until that approval is obtained unless
approval is essentially a formality (or perfunctory), for
example, if management and the members of the board of directors
control enough votes to approve the arrangement. Similarly,
individual awards that are subject to approval by the board of
directors, management, or both are not deemed to be granted
until all such approvals are obtained. The grant date for an
award of equity instruments is the date that a grantee begins to
benefit from, or be adversely affected by, subsequent changes in
the price of the grantor’s equity shares. Paragraph 718-10-25-5
provides guidance on determining the grant date. See Service Inception Date.
Implicit Service Period
A service period that is not explicitly stated in the terms of a
share-based payment award but that may be inferred from an
analysis of those terms and other facts and circumstances. For
instance, if an award of share options vests upon the completion
of a new product design and it is probable that the design will be completed in 18
months, the implicit service period is 18 months. See Derived Service Period,
Explicit Service
Period, and Requisite
Service Period.
Intrinsic Value
The amount by which the fair value of the underlying stock
exceeds the exercise price of an option. For example, an option
with an exercise price of $20 on a stock whose current market
price is $25 has an intrinsic value of $5. (A nonvested share
may be described as an option on that share with an exercise
price of zero. Thus, the fair value of a share is the same as
the intrinsic value of such an option on that share.)
Issued, Issuance, or Issuing of an Equity Instrument
An equity instrument is issued when the issuing entity receives
the agreed-upon consideration, which may be cash, an enforceable
right to receive cash, or another financial instrument, goods,
or services. An entity may conditionally transfer an equity
instrument to another party under an arrangement that permits
that party to choose at a later date or for a specified time
whether to deliver the consideration or to forfeit the right to
the conditionally transferred instrument with no further
obligation. In that situation, the equity instrument is not
issued until the issuing entity has received the consideration.
The grant of stock options or other equity instruments subject
to vesting conditions is not considered to be issuance.
Market Condition
A condition affecting the exercise price, exercisability, or
other pertinent factors used in determining the fair value of an
award under a share-based payment arrangement that relates to
the achievement of either of the following:
- A specified price of the issuer’s shares or a specified amount of intrinsic value indexed solely to the issuer’s shares
- A specified price of the issuer’s shares in terms of a similar (or index of similar) equity security (securities). The term similar as used in this definition refers to an equity security of another entity that has the same type of residual rights. For example, common stock of one entity generally would be similar to the common stock of another entity for this purpose.
Measurement Date
The date at which the equity share price and other pertinent
factors, such as expected volatility, that enter into
measurement of the total recognized amount of compensation cost
for an award of share-based payment are fixed.
Modification
A change in the terms or conditions of a share-based payment
award.
Nonpublic Entity
Any entity other than one that meets any of the following
criteria:
- 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
- Makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market
- 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.
Nonvested Shares
Shares that an entity has not yet issued because the agreed-upon
consideration, such as the delivery of specified goods or
services and any other conditions necessary to earn the right to
benefit from the instruments, has not yet been satisfied.
Nonvested shares cannot be sold. The restriction on sale of
nonvested shares is due to the forfeitability of the shares if
specified events occur (or do not occur).
Option
Unless otherwise stated, a call option that
gives the holder the right to purchase shares of common stock
from the reporting entity in accordance with an agreement upon
payment of a specified amount. Options include, but are not
limited to, options granted and stock purchase agreements
entered into with grantees. Options are considered securities.
See Call Option.
Participating Security
A security that may
participate in undistributed earnings with common stock, whether
that participation is conditioned upon the occurrence of a
specified event or not. The form of such participation does not
have to be a dividend — that is, any form of participation in
undistributed earnings would constitute participation by that
security, regardless of whether the payment to the security
holder was referred to as a dividend.
Performance Condition
A condition affecting the vesting, exercisability, exercise
price, or other pertinent factors used in determining the fair
value of an award that relates to both of the following:
- Rendering service or delivering goods for a specified (either explicitly or implicitly) period of time
- Achieving a specified performance target that is defined solely by reference to the grantor’s own operations (or activities) or by reference to the grantee’s performance related to the grantor’s own operations (or activities).
Attaining a specified growth rate in return on assets, obtaining
regulatory approval to market a specified product, selling
shares in an initial public offering or other financing event,
and a change in control are examples of performance conditions.
A performance target also may be defined by reference to the
same performance measure of another entity or group of entities.
For example, attaining a growth rate in earnings per share (EPS)
that exceeds the average growth rate in EPS of other entities in
the same industry is a performance condition. A performance
target might pertain to the performance of the entity as a whole
or to some part of the entity, such as a division, or to the
performance of the grantee if such performance is in accordance
with the terms of the award and solely relates to the grantor’s
own operations (or activities).
Probable
The future event or events are likely to occur.
Public Business Entity
A 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.
- 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).
- 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.
- 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.
- 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.
- 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 entity’s 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.
Public Entity
An entity that meets any of the following criteria:
- 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
- Makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market
- 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.
Purchased Call Option
A contract that allows the reporting entity to buy a specified
quantity of its own stock from the writer of the contract at a
fixed price for a given period. See Call Option.
Requisite Service Period
The period or periods during which an employee is required to
provide service in exchange for an award under a share-based
payment arrangement. The service that an employee is required to
render during that period is referred to as the requisite
service. The requisite service period for an award that has only
a service condition is presumed to be the vesting period, unless
there is clear evidence to the contrary. If an award requires
future service for vesting, the entity cannot define a prior
period as the requisite service period. Requisite service
periods may be explicit, implicit, or derived, depending on the
terms of the share-based payment award.
Restricted Share
A share for which sale is contractually or governmentally
prohibited for a specified period of time. Most grants of shares
to grantees are better termed nonvested shares because the
limitation on sale stems solely from the forfeitability of the
shares before grantees have satisfied the service, performance,
or other condition(s) necessary to earn the rights to the
shares. Restricted shares issued for consideration other than
for goods or services, on the other hand, are fully paid for
immediately. For those shares, there is no period analogous to
an employee’s requisite service period or a nonemployee’s
vesting period during which the issuer is unilaterally obligated
to issue shares when the purchaser pays for those shares, but
the purchaser is not obligated to buy the shares. The term
restricted shares refers only to fully vested and outstanding
shares whose sale is contractually or governmentally prohibited
for a specified period of time. Vested equity instruments that
are transferable to a grantee’s immediate family members or to a
trust that benefits only those family members are restricted if
the transferred instruments retain the same prohibition on sale
to third parties. See Nonvested
Shares.
Restriction
A contractual or governmental provision that prohibits sale (or
substantive sale by using derivatives or other means to
effectively terminate the risk of future changes in the share
price) of an equity instrument for a specified period of
time.
Security
A share, participation, or other interest in property or in an
entity of the issuer or an obligation of the issuer that has all
of the following characteristics:
- It is either represented by an instrument issued in bearer or registered form or, if not represented by an instrument, is registered in books maintained to record transfers by or on behalf of the issuer.
- It is of a type commonly dealt in on securities exchanges or markets or, when represented by an instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for investment.
- It either is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations.
Service Condition
A condition affecting the vesting, exercisability, exercise
price, or other pertinent factors used in determining the fair
value of an award that depends solely on an employee rendering
service to the employer for the requisite service period or a
nonemployee delivering goods or rendering services to the
grantor over a vesting period. A condition that results in the
acceleration of vesting in the event of a grantee’s death,
disability, or termination without cause is a service
condition.
Service Inception Date
The date at which the employee’s requisite service period or the
nonemployee’s vesting period begins. The service inception date
usually is the grant date, but the service inception date may
differ from the grant date (see Example 6 [see paragraph
718-10-55-107] for an illustration of the application of this
term to an employee award).
Settlement of an Award
An action or event that irrevocably extinguishes the issuing
entity’s obligation under a share-based payment award.
Transactions and events that constitute settlements include the
following:
- Exercise of a share option or lapse of an option at the end of its contractual term
- Vesting of shares
- Forfeiture of shares or share options due to failure to satisfy a vesting condition
- An entity’s repurchase of instruments in exchange for assets or for fully vested and transferable equity instruments.
The vesting of a share option is not a settlement because the
entity remains obligated to issue shares upon exercise of the
option.
Share Option
A contract that gives the holder the right, but not the
obligation, either to purchase (to call) or to sell (to put) a
certain number of shares at a predetermined price for a
specified period of time.
Share Unit
A contract under which the holder has the right to convert each
unit into a specified number of shares of the issuing
entity.
Share-Based Payment Arrangements
An arrangement under which either of the following conditions is
met:
- One or more suppliers of goods or services (including employees) receive awards of equity shares, equity share options, or other equity instruments.
- The entity incurs liabilities to suppliers that meet
either of the following conditions:
- The amounts are based, at least in part, on the price of the entity’s shares or other equity instruments. (The phrase at least in part is used because an award may be indexed to both the price of the entity’s shares and something other than either the price of the entity’s shares or a market, performance, or service condition.)
- The awards require or may require settlement by issuance of the entity’s shares.
The term shares 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.
Also called share-based compensation arrangements.
Share-Based Payment Transactions
A transaction under a share-based payment arrangement, including
a transaction in which an entity acquires goods or services
because related parties or other holders of economic interests
in that entity awards a share-based payment to an employee or
other supplier of goods or services for the entity’s benefit.
Also called share-based compensation transactions.
Tandem Award
An award with two or more components in which exercise of one
part cancels the other(s).
Terms of a Share-Based Payment Award
The 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
entity’s 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.
Time Value
The portion of the fair value of an option that exceeds its
intrinsic value. For example, a call option with an exercise
price of $20 on a stock whose current market price is $25 has
intrinsic value of $5. If the fair value of that option is $7,
the time value of the option is $2 ($7 – $5).
Vest
To earn the rights to. A share-based payment award becomes vested
at the date that the grantee’s right to receive or retain
shares, other instruments, or cash under the award is no longer
contingent on satisfaction of either a service condition or a
performance condition. Market conditions are not vesting
conditions.
The stated vesting provisions of an award often establish the
employee’s requisite service period or the nonemployee’s vesting
period, and an award that has reached the end of the applicable
period is vested. However, as indicated in the definition of
requisite service period and equally applicable to a
nonemployee’s vesting period, the stated vesting period may
differ from those periods in certain circumstances. Thus, the
more precise terms would be options, shares, or awards for which
the requisite good has been delivered or service has been
rendered and the end of the employee’s requisite service period
or the nonemployee’s vesting period.
Volatility
A measure of the amount by which a financial variable such as a
share price has fluctuated (historical volatility) or is
expected to fluctuate (expected volatility) during a period.
Volatility also may be defined as a probability-weighted measure
of the dispersion of returns about the mean. The volatility of a
share price is the standard deviation of the continuously
compounded rates of return on the share over a specified period.
That is the same as the standard deviation of the differences in
the natural logarithms of the stock prices plus dividends, if
any, over the period. The higher the volatility, the more the
returns on the shares can be expected to vary — up or down.
Volatility is typically expressed in annualized terms.