12.1 Statement of Financial Position
12.1.1 Receivables
ASC 505-10
Receivables for Issuance of Equity
45-2 An entity may receive a note, rather than cash, as a contribution to its equity. The transaction may be a sale of capital stock or a contribution to paid-in capital. Reporting the note as an asset is generally not appropriate, except in very limited circumstances in which there is substantial evidence of ability and intent to pay within a reasonably short period of time, for example, as discussed for public entities in paragraph 210-10-S99-1 (paragraphs 27 through 29), which requires a deduction of the receivable from equity. However, such notes may be recorded as an asset if collected in cash before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25).
SEC Staff Accounting Bulletins
SAB Topic 4.E, Receivables
From Sale of Stock [Reproduced in ASC
310-10-S99-2]
Facts:
Capital stock is sometimes issued to officers or
other employees before the cash payment is
received.
Question: How should the receivables from the
officers or other employees be presented in the
balance sheet?
Interpretive Response: The
amount recorded as a receivable should be
presented in the balance sheet as a deduction from
stockholders’ equity. This is generally consistent
with Rule 5-02.30 of Regulation S-X which states
that accounts or notes receivable arising from
transactions involving the registrant’s capital
stock should be presented as deductions from
stockholders’ equity and not as assets.
It should be noted generally
that all amounts receivable from officers and
directors resulting from sales of stock or from
other transactions (other than expense advances or
sales on normal trade terms) should be separately
stated in the balance sheet irrespective of
whether such amounts may be shown as assets or are
required to be reported as deductions from
stockholders’ equity.
The staff will not suggest
that a receivable from an officer or director be
deducted from stockholders’ equity if the
receivable was paid in cash prior to the
publication of the financial statements and the
payment date is stated in a note to the financial
statements. However, the staff would consider the
subsequent return of such cash payment to the
officer or director to be part of a scheme or plan
to evade the registration or reporting
requirements of the securities laws.
Generally, receivables that result from the issuance of shares classified as permanent or mezzanine equity should be presented as a reduction of each respective class of stock (i.e., contra-equity). That is, receivables that result from the issuance of shares classified as permanent equity generally should be presented as a reduction of permanent equity in accordance with ASC 505-10-45-2. Similarly, receivables that result from the issuance of shares classified as mezzanine equity should be presented as a reduction of mezzanine equity.
SAB Topic 4.E (reproduced in ASC 310-10-S99-2) generally requires entities to classify any outstanding receivables from officers or other employees related to the issuance of stock to officers or other employees as a deduction from stockholders’ equity rather than as an asset.
Asset classification of such receivables may be appropriate only when the receivable is fully repaid in cash before the financial statements are issued. The date of payment must be disclosed in the notes to the financial statements. SAB Topic 4.E cautions, however, that the SEC staff would consider any subsequent return of cash to the officer or employee as potentially representing an effort “to evade the registration or reporting requirements of the securities laws.” Further, receivables of this nature must be disclosed separately regardless of whether they are classified as an asset or as a deduction from equity. Entities preparing to file a registration statement with the SEC should be particularly cognizant of the potential legal ramifications associated with loans to employees and should consult with their legal counsel to address any issues well before their public offering.
In addition, an entity that allows an employee to finance the purchase of shares should consider whether recourse or nonrecourse notes have been tendered. Nonrecourse notes are not recognized because such a financing is accounted for, in substance, as stock options. See Section 3.11.
12.1.2 Deferred Tax Assets
As discussed in Section 4.12.2, NQSOs are options that do not qualify for treatment as ISOs or ESPPs under the provisions of IRC Sections 421 through 424. NQSOs give employers more flexibility than ISOs.
In accordance with ASC 740-10-45-4, an entity must classify the DTA as
noncurrent on the balance sheet.
See Chapter 10 of Deloitte’s Roadmap
Income Taxes for a discussion
of the income tax effects of share-based
payments.
12.1.3 Capitalization of Inventory
SEC Staff Accounting Bulletins
SAB Topic 14.I, Capitalization
of Compensation Cost Related to Share-Based
Payment Arrangements
Facts: Company K is a manufacturing company
that grants share options to its production
employees. Company K has determined that the cost
of the production employees’ service is an
inventoriable cost. As such, Company K is required
to initially capitalize the cost of the share
option grants to these production employees as
inventory and later recognize the cost in the
income statement when the inventory is
consumed.85
Question: If Company K elects to adjust its
period end inventory balance for the allocable
amount of share-option cost through a period end
adjustment to its financial statements, instead of
incorporating the share-option cost through its
inventory costing system, would this be considered
a deficiency in internal controls?
Interpretive Response: No. FASB ASC Topic
718, Compensation — Stock Compensation, does not
prescribe the mechanism a company should use to
incorporate a portion of share-option costs in an
inventory-costing system. The staff believes
Company K may accomplish this through a period end
adjustment to its financial statements. Company K
should establish appropriate controls surrounding
the calculation and recording of this period end
adjustment, as it would any other period end
adjustment. The fact that the entry is recorded as
a period end adjustment, by itself, should not
impact managements ability to determine that the
internal control over financial reporting, as
defined by the SEC’s rules implementing Section
404 of the Sarbanes-Oxley Act of
2002,86 is effective.
______________________________
85 FASB ASC
paragraph 718-10-25-2A.
86 Release No.
34-47986, June 5, 2003, Management’s Report on
Internal Control Over Financial Reporting and
Certification of Disclosure in Exchange Act Period
Reports.
If compensation cost associated with share-based payment awards is part of the cost of inventory, an entity should initially capitalize it as inventory and later recognize it in the income statement when the inventory is consumed. However, the SEC staff has indicated that it may be reasonable for an entity instead to adjust the period-end inventory balance for compensation cost through a period-end adjustment and not incorporate the cost in its inventory costing system.
12.1.4 Fully Vested Nonemployee Awards
ASC 718-10
Classification of Assets Other Than a Note or a Receivable for Nonemployee Awards
45-3 As discussed in paragraph 718-10-35-1B, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, nonforfeitable, nonemployee share-based payment awards that are issued at the date the grantor and nonemployee enter into an agreement for goods or services (and no specific performance is required by the nonemployee to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the award. The transferability (or lack thereof) of the awards shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which awards are transferred to nonemployees in exchange for goods or services.
For additional information about the classification of assets, other than a note
or a receivable, that are received in exchange for fully vested, nonforfeitable
equity instruments, see Section 9.7.
12.1.5 Presentation of Awards With Repurchase Features That Function as Vesting Conditions
As discussed in Section
3.4.3, repurchase features included in
a share-based payment award may at times function
in substance as vesting conditions. For example, a
stock option or similar instrument may be “early
exercised” and include such repurchase features.
An early exercise of a stock option or similar
instrument refers to a grantee’s ability to change
his or her tax position by exercising an option or
similar instrument and receiving shares before the
award is vested. The early exercise of the stock
option is generally not considered substantive for
accounting purposes given the repurchase features
included in such awards. However, the shares
issued to a grantee upon an early exercise of a
stock option or similar instrument may be
considered legally outstanding common stock. In
accordance with SEC Regulation S-X, Rule 5-02(29),
SEC registrants are required to disclose the
number of common shares outstanding on the balance
sheet. If the shares are deemed to be legally
outstanding, the number of shares disclosed as
outstanding on the balance sheet may differ from
the number of shares outstanding for accounting
purposes. Entities should consider whether
disclosing this difference is necessary on the
basis of their facts and circumstances. These
considerations also apply to restricted stock or
nonvested shares with repurchase features that
function as vesting conditions.