1.4 Recognition

ASC 718 requires compensation cost to be recognized over the employee’s requisite service period or the nonemployee’s vesting 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 nonemployee’s vesting period is the period over which the cost of a nonemployee share-based payment award is recognized (i.e., the period the goods or services are provided). The service inception date, which is generally the grant date, is the beginning of the requisite service period or the nonemployee’s vesting 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 or the nonemployee’s vesting period unless there are other substantive terms to the contrary. For nonemployee share-based payment awards, an entity should recognize compensation cost “when it obtains the goods or as services are received” and “in the same period(s) and in the same manner as if the grantor had paid cash for the goods or services instead of paying with or using the share-based payment award.” This is referred to within ASC 718 and this Roadmap as the “nonemployee’s vesting period.”

An employee’s requisite service period4 can be explicit, implicit, or derived, depending on the award’s 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 entity’s 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,5 or both. For service conditions, an entity can, separately for employee awards and nonemployee awards, make an entity-wide accounting policy election to either (1) estimate the total number of awards for which the good will not be delivered or the 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 or nonemployees will cease providing goods or services before satisfying the service condition 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 employee’s requisite service period or the nonemployee’s vesting period is based on the number of awards for which the employee’s requisite service is rendered or the nonemployee’s goods or services are provided. If the entity elects the second option, it will reverse previously recognized compensation cost when a grantee forfeits the award by terminating employment (for employee awards) or ceasing to provide goods or services (for nonemployee awards) before the grantee has satisfied the service condition.

For awards that vest upon the achievement of a performance condition, an entity will need to assess the probability of such achievement 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 a grantee forfeits an award that contains a market condition because of failure to meet the market condition but delivers the promised good or renders the requisite service, compensation cost previously recognized is not reversed. Compensation cost is only reversed if the grantee does not deliver the promised good or render the requisite service, because a market condition is not considered a vesting condition. In determining the fair-value-based measurement of the award, an entity takes into account the likelihood that it will meet the market condition.

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

Footnotes

Determining the requisite service period is only applicable to employee awards. However, for certain nonemployee awards, an entity may analogize to the guidance on calculating a requisite service period and determining the service inception date when such guidance is relevant to the accounting for the nonemployee award. For additional discussion of a nonemployee’s vesting period, see Section 9.3.2.

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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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.