1.2 Substantive Terms
ASC 718-10 — Glossary
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.
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 for a note that provides no recourse to other assets of the grantee (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 award’s terms when evaluating a share-based payment arrangement. While the written plan and agreement are generally the best evidence of the award’s terms, an entity’s past practice or other factors may indicate that the substantive terms differ from the written ones. For example, if an entity’s award agreement indicates that the award will be settled in shares of the entity’s 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 grantee 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 in a share-based payment arrangement for no consideration if the grantee ceases providing goods or services before four years after the grant date of the awards. In this scenario, the repurchase feature functions, in substance, as a vesting condition.