1.6 Classification

As described above, an entity’s 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 grantee is subject to the risks and rewards associated with equity share ownership 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 award’s substantive terms and conditions, as well as an entity’s 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.