12.2 Statement of Operations
ASC 718 requires compensation cost from share-based payment awards to be (1) recorded in net income, (2) either expensed or capitalized (and subsequently expensed) in an entity’s financial statements, and (3) classified appropriately as either equity or a liability in accordance with the classification criteria in ASC 718 (see Chapter 5). However, ASC 718 provides little guidance on how compensation cost associated with share-based payment awards should be presented in the statement of operations.
12.2.1 Classification of Compensation Expense
SEC Staff Accounting Bulletins
SAB Topic 14.F, Classification of
Compensation Expense Associated With Share-Based Payment
Arrangements
Facts: Company
G utilizes both cash and share-based payment
arrangements to compensate its employees and nonemployee
service providers. Company G would like to emphasize in
its income statement the amount of its compensation that
did not involve a cash outlay.
Question: How
should Company G present in its income statement the
non-cash nature of its expense related to share-based
payment arrangements?
Interpretive
Response: The staff believes Company G should
present the expense related to share-based payment
arrangements in the same line or lines as cash
compensation paid to the same employees or
nonemployees.84 The staff believes a
company could consider disclosing the amount of expense
related to share-based payment arrangements included in
specific line items in the financial statements.
Disclosure of this information might be appropriate in a
parenthetical note to the appropriate income statement
line items, on the cash flow statement, in the footnotes
to the financial statements, or within MD&A.
______________________________
84 FASB ASC Topic 718 does
not identify a specific line item in the income
statement for presentation of the expense related to
share-based payment arrangements, with the exception of
the guidance in ASC 718-10-15-5A on share-based payment
awards granted to a customer.
The SEC staff believes that compensation expense related to share-based payment arrangements (e.g., cost of sales, R&D, selling and administrative expenses) should be presented within the appropriate line items on the face of the statement of operations and not separately within a single share-based compensation line item. That is, presentation in the statement of operations should not be governed by the form of consideration paid (e.g., cash or share-based payment). The staff believes that instead, an entity could consider disclosing the amount of expense related to share-based payment arrangements presented within specific line items in the financial statements. Disclosure of this information might be appropriate in a parenthetical note to the appropriate income statement line items, in the cash flow statement, in the footnotes to the financial statements, or in MD&A.
The following is an example of an acceptable
disclosure of share-based compensation expense presented within specific line
items:
12.2.2 Share-Based Payment Awards Granted to Employees and Nonemployees of an Equity Method Investee
ASC 323-10
Share-Based Compensation Granted to Employees and
Nonemployees of an Equity Method Investee
25-3 Paragraphs 323-10-25-4
through 25-6 provide guidance on accounting for
share-based payment awards granted by an investor to
employees or nonemployees of an equity method investee
that provide goods or services to the investee that are
used or consumed in the investee’s operations when no
proportionate funding by the other investors occurs and
the investor does not receive any increase in the
investor’s relative ownership percentage of the
investee. That guidance assumes that the investor’s
grant of share-based payment awards to employees or
nonemployees of the equity method investee was not
agreed to in connection with the investor’s acquisition
of an interest in the investee. That guidance applies to
share-based payment awards granted to employees or
nonemployees of an investee by an investor based on that
investor's stock (that is, stock of the investor or
other equity instruments indexed to, and potentially
settled in, stock of the investor).
25-4 In
the circumstances described in paragraph 323-10-25-3, a
contributing investor shall expense the cost of
share-based payment awards granted to employees and
nonemployees of an equity method investee as incurred
(that is, in the same period the costs are recognized by
the investee) to the extent that the investor’s claim on
the investee’s book value has not been increased.
25-5 In the circumstances
described in paragraph 323-10-25-3, other equity method
investors in an investee (that is, noncontributing
investors) shall recognize income equal to the amount
that their interest in the investee’s net book value has
increased (that is, their percentage share of the
contributed capital recognized by the investee) as a
result of the disproportionate funding of the
compensation costs. Further, those other equity method
investors shall recognize their percentage share of
earnings or losses in the investee (inclusive of any
expense recognized by the investee for the share-based
compensation funded on its behalf).
SEC Observer Comment: Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee
S99-4 The following is the
text of SEC Observer Comment: Accounting by an Investor
for Stock-Based Compensation Granted to Employees of an
Equity Method Investee.
Paragraph
323-10-25-3 provides guidance on the accounting by an
investor for stock-based compensation based on the
investor’s stock granted to employees of an equity
method investee. Investors that are SEC registrants
should classify any income or expense resulting from
application of this guidance in the same income
statement caption as the equity in earnings (or losses)
of the investee.
ASC 323 provides guidance on share-based payment awards granted by an investor
to employees and nonemployees of an equity method investee. Generally, investors
of the equity method investee (both the contributing investors and
noncontributing investors) classify any income or expense associated with the
awards in the same caption as the equity in earnings of the investee.
12.2.3 Nonemployee Awards Issued in Exchange for Goods or Services
The SEC staff has reviewed a number of cases in which entities have issued share-based payment awards (e.g., warrants, shares, or convertible instruments) to suppliers, service providers, customers, or partners. The staff has generally held as follows:
- When share-based payment awards are issued to customers or potential customers in arrangements in which the awards will not vest or become exercisable without purchases by the recipient, the related cost must be reported as a sales discount — in other words, as a reduction of revenue.
- When awards are issued to suppliers or potential suppliers and they will not vest or become exercisable unless the recipient provides goods or services to the issuer, the cost of the award should be reported as a cost of the related goods or services.
- Separate line items in the statement of operations should not be presented for the apparent purpose of emphasizing that a portion of the sales discounts or expenses did not involve a cash outlay. This requirement is consistent with the guidance in SAB Topic 14.F (see Section 12.2.1).
- Awards that do not require any performance from the counterparty are related to past transactions and should therefore be classified appropriately (e.g., as cost of sales or reduction of revenue and not as marketing or nonoperating expenses).
12.2.4 Payroll Taxes
ASC 718-10
25-23 Payroll taxes, even though directly related to the appreciation on stock options, are operating expenses and shall be reflected as such in the statement of operations.
Employer payroll taxes incurred as a result of share-based payment transactions
should be reflected as operating expenses.