10-1 The objective of accounting for transactions under share-based payment arrangements is to recognize in the financial statements the goods or services received in exchange for equity instruments granted or liabilities incurred and the related cost to the entity as those goods or services are received. This Topic uses the terms compensation and payment in their broadest senses to refer to the consideration paid for goods or services or the consideration paid to a customer.
10-2 This Topic requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Topic establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions except for equity instruments held by employee stock ownership plans.
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 generally applies to share-based payments granted to (1) employees or nonemployees in exchange for goods or services to be used or consumed in the grantor’s own operations or (2) customers of the entity.3 Further, such payments must be either (1) settled by issuing the entity’s equity shares or other equity instruments or (2) indexed, at least in part, to the value of the entity’s equity shares or other equity instruments. See Chapter 2 for a more detailed discussion of the scope of ASC 718.
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.”
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.
Share-based payment transactions are measured on the basis of the fair value (or in certain situations, the calculated value or intrinsic value) of the equity instrument issued. As noted in Section 1.1, ASC 718 refers to a “fair-value-based” method for measuring the value of the share-based payment. Conceptually, the fair value determined under this method is not fair value as defined in ASC 820, which explicitly excludes share-based payments from its scope. Although fair value measurement techniques are used in the fair-value-based measurement method, it specifically excludes the effects of vesting conditions and other types of features (e.g., clawback provisions) that would be included in a fair value measurement that is based on ASC 820. Therefore, when the term “fair value” is used in ASC 718 and in this Roadmap, it refers to a fair-value-based measurement determined in accordance with the requirements of ASC 718.
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.
ASC 718-10 — Glossary
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.
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.
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.
ASC 718 is the primary source of guidance in U.S. GAAP on the accounting for employee and nonemployee share-based payment awards. IFRS 2 is the primary source of guidance on such awards under IFRS Accounting Standards. Although much of the U.S. GAAP guidance is converged with that in IFRS 2, there are some notable differences. See Appendix A for a discussion of those differences.