2.1 General
ASC 718-10
Overall Guidance
15-1 The Scope Section of the Overall Subtopic establishes the pervasive scope for all Subtopics of the Compensation — Stock Compensation Topic. Unless explicitly addressed within specific Subtopics, the following scope guidance applies to all Subtopics of the Compensation — Stock Compensation Topic, with the exception of Subtopic 718-50, which has its own discrete scope.
Entities
15-2 The guidance in the Compensation — Stock Compensation Topic applies to all entities that enter into share-based payment transactions.
15-3 The guidance in the
Compensation — Stock Compensation Topic applies to all
share-based payment transactions in which a grantor acquires
goods or services to be used or consumed in the grantor’s
own operations or provides consideration payable to a
customer by issuing (or offering to issue) its shares, share
options, or other equity instruments or by incurring
liabilities to an employee or a nonemployee that meet either
of the following conditions:
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The amounts are based, at least in part, on the price of the entity’s shares or other equity instruments. (The phrase at least in part is used because an award of share-based compensation may be indexed to both the price of an entity’s shares and something else that is neither the price of the entity’s shares nor a market, performance, or service condition.)
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The awards require or may require settlement by issuing the entity’s equity shares or other equity instruments.
15-3A
Paragraphs 323-10-25-3 through 25-5 provide guidance on
accounting for share-based compensation 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.
15-5 The guidance in this Topic
does not apply to transactions involving share-based payment
awards granted to a lender or an investor that provides
financing to the issuer. However, see paragraphs
815-40-35-14 through 35-15, 815-40-35-18, 815-40-55-49, and
815-40-55-52 for guidance on an issuer’s accounting for
modifications or exchanges of written call options to
compensate grantees.
- Subparagraph superseded by Accounting Standards Update No. 2018-07.
- Subparagraph superseded by Accounting Standards Update No. 2019-08.
- Subparagraph superseded by Accounting Standards Update No. 2019-08.
15-5A Share-based payment
awards granted to a customer shall be measured and
classified in accordance with the guidance in this Topic
(see paragraph 606-10-32-25A) and reflected as a reduction
of the transaction price and, therefore, of revenue in
accordance with paragraph 606-10-32-25 unless the
consideration is in exchange for a distinct good or service.
If share-based payment awards are granted to a customer as
payment for a distinct good or service from the customer,
then an entity shall apply the guidance in paragraph
606-10-32-26.
15-6 Paragraphs 805-30-30-9 through 30-13 provide guidance on determining whether share-based payment awards issued in a business combination are part of the consideration transferred in exchange for the acquiree, and therefore in the scope of Topic 805, or are for continued service to be recognized in the postcombination period in accordance with this Topic.
15-7 The guidance in the Overall Subtopic does not apply to equity instruments held by an employee stock ownership plan.
ASC 718 applies to all transactions in which an entity receives goods or
services to be used or consumed in the entity’s own operations in exchange for
share-based instruments. In such transactions, an entity effectively “pays” grantees
in the form of share-based instruments for goods or services. Common examples of
share-based payment awards include stock options, SARs, restricted stock,1 and RSUs.
In addition, entities must apply ASC 718 to measure and classify
share-based payments that are issued as consideration payable to a customer and are
not in exchange for distinct goods or services (i.e., share-based sales incentives).
Because entities are also required to recognize share-based sales incentives in
accordance with ASC 606, the accounting for such awards is unique. See Chapter 14 for additional
information.
ASC 718 does not apply to share-based instruments issued
in exchange for cash or other assets (i.e., detachable warrants or similar
instruments issued in a financing transaction) because such instruments are not
issued in exchange for goods or services. Other share-based transactions, or aspects
of these transactions, that are not within the scope of ASC 7182 include:
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Equity instruments issued as consideration in a business combination — ASC 718 does not address the accounting for equity instruments issued as consideration in a business combination. The measurement date for such equity instruments is described in ASC 805-30-30-7.ASC 805 also provides guidance on determining what portion of share-based payment awards exchanged in a business combination is (1) part of the consideration transferred in a business combination or (2) related to service to be recognized in the postcombination period and therefore is within the scope of ASC 718. ASC 805-20-30-21, ASC 805-30-30-9 through 30-13, ASC 805-30-55-6 through 55-13, ASC 805-30-55-17 through 55-35, ASC 805-740-25-10 and 25-11, and ASC 805-740-45-5 and 45-6 provide guidance on share-based payment awards exchanged in connection with a business combination. See Chapter 10 for additional information.
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Options or warrants issued for cash or other than for goods or services — Financial instruments issued for cash or other financial instruments (i.e., other than for goods or services) are accounted for in accordance with the relevant literature on accounting for and reporting the issuance of financial instruments, such as ASC 815 and ASC 480.
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Detachable options or warrants issued in a financing transaction — ASC 470-20 describes how an entity should account for detachable warrants, or similar instruments, issued in a financing transaction.
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Share-based awards that are granted to employees or nonemployees and settled in shares of an unrelated entity — ASC 815-10-45-10 and ASC 815-10-55-46 through 55-48 describe the accounting for stock options that are issued to grantees and indexed to and settled in publicly traded shares of an unrelated entity. See Section 2.11 for more information about the accounting for awards that are issued to grantees and indexed to and settled in shares of an unrelated entity.
Only share-based payment awards that are issued in exchange for goods or
services or issued as share-based sales incentives are within the scope of ASC 718.
Further, such awards must be settled (or may require settlement) by issuing the
entity’s equity shares or other equity instruments or they must be indexed, at least
in part, to the value of the entity’s equity shares or other equity instruments. In
this context, the word “indexed” indicates that the value the grantee receives upon
settlement of the award is, at least in part, determined on the basis of the value
of the entity’s equity. For instance, an entity may award a cash-settled SAR that
can only be settled in cash. In such circumstances, the amount of cash the grantee
receives upon settlement of the award is based on the relationship of the market
price of the entity’s equity shares to the exercise price of the award; therefore,
the award is considered indexed to the entity’s equity and is within the scope of
ASC 718.
Example 2-1
Entity A, a public entity, offers a long-term incentive plan (LTIP) to certain of its employees. At the beginning of each year, a target cash bonus based on a specific dollar amount is established for each employee. Each employee in the LTIP will receive a predetermined percentage of his or her target bonus at the end of three years on the basis of the total return on A’s stock price relative to that of its competitors over the three-year performance period. The return on A’s stock price is ranked with that of its competitors from the highest to the lowest performer. On the basis of A’s ranking, each employee will receive a percentage of his or her target bonus that increases or decreases as A’s ranking increases or decreases.
For example, at the beginning of the three-year performance period, A sets a target cash bonus of $100,000 for an employee. Entity A includes nine of its competitors in its peer group to establish a ranking. Depending on the ranking, the employee will receive a percentage that ranges from 0 percent to 200 percent of the target bonus. For instance, if A ranks first in stock price return, the employee will receive 200 percent of $100,000, or $200,000; if A ranks fifth, the employee will receive 100 percent of $100,000, or $100,000; and if A ranks tenth or last, the employee will not receive a bonus.
Because the bonus is settled only in cash, A’s obligation under the LTIP is classified as a share-based liability. The liability is based, in part, on the price of A’s shares. That is, the share-based liability is based on the return on A’s stock price relative to the returns on the stock prices of A’s competitors. While the bonuses to be paid are not linearly correlated to the return on A’s stock price, the amount of the bonus does depend on the return on A’s stock price relative to that of its competitors. Accordingly, the LTIP is within the scope of, and therefore is accounted for in accordance with, ASC 718. Under ASC 718-30-35-3, A “shall measure a liability award under a share-based payment arrangement based on the award’s fair value remeasured at each reporting date until the date of settlement.”
Informal discussions with the FASB staff support the conclusion that LTIPs can be within the scope of ASC 718.
If an award offers a grantee a fixed monetary amount that is settled in a variable number of an entity’s shares, the amount the grantee receives upon settlement of the award is not based on the value of the entity’s equity and therefore is not considered indexed to the entity’s own equity. However, the fixed monetary amount will be settled by issuing a variable number of the entity’s shares. Because the award is settled by issuing the entity’s own equity, the award is within the scope of ASC 718.
Example 2-2
An entity sets a bonus of $100,000 for its chief executive if the executive remains employed for a two-year period. The bonus will be settled by issuing enough equity shares whose value equals $100,000. Therefore, if the entity’s share price is $50 at the end of the second year, the entity will settle the bonus by issuing 2,000 ($100,000 bonus ÷ $50 share price) of the entity’s equity shares. This bonus award is within the scope of ASC 718 because it is settled by issuing the entity’s own equity.
Share-based payment awards that are indexed to or settled in something other than an entity’s shares may be within the scope of ASC 718. ASC 718-10-20 defines share-based payment arrangements, in part, as follows:
The term shares [in ASC 718-10-15-3] includes various forms of ownership interest that may not take the legal form of securities (for example, partnership interests), as well as other interests, including those that are liabilities in substance but not in form. Equity shares refers only to shares that are accounted for as equity.
That is, the legal form of the entity’s award does not preclude it from being within the scope of ASC 718. In this context, the term “shares” broadly represents instruments that entitle the holder to share in the risks and rewards of the entity as an owner.
Example 2-3
Trust Unit Rights
An entity may grant its employees trust unit rights to purchase a unit in a unit
investment trust at a reduced exercise price. Upon exercise
of the unit right, the holder receives publicly traded trust
units, which are equal to fractional undivided interests in
the trust. The trust units are the only voting,
participating equity securities of the trust. The trust
structure is created to purchase and hold a fixed portfolio
of securities or other assets, which represent the “trust
portfolio.” The trust then distributes the income generated
from the portfolio to the holders of the trust units.
Therefore, owning a trust unit allows the holder to share in
the appreciation of the trust portfolio. Common examples of
this type of investment trust structure include mutual funds
and real estate investment trusts.
While the entity is offering to issue unit rights, which are not legal securities themselves, the rights entitle the holder to trust units. Although these trust units are not “shares” in the strictest sense, they provide the holder with the risks and rewards of the entity as an owner (e.g., voting rights). Accordingly, this arrangement is within the scope of ASC 718.
Example 2-4
Phantom Stock Plans
Under a typical phantom stock plan, an employee is granted a theoretical number of units that are exercisable into common stock of the entity. These units are not legal securities themselves and usually are issued only on a memorandum basis. The units do not have voting rights with the common stockholders. The value of each phantom unit is based on the value of the entity’s stock and, therefore, appreciates and depreciates on the basis of fluctuations in the value of the entity’s stock.
The phantom stock unit holders do not have the same rights as a common stockholder (i.e., voting rights). However, because the phantom units are indexed to and settled in the entity’s equity, this arrangement is within the scope of ASC 718.
Footnotes
1
ASC 718 refers to restricted stock (and RSUs) as nonvested
shares (and nonvested share units).
2
ESOPs are within the scope of ASC 718-40 and are not covered
in this Roadmap. ASC 718-10-20 defines an ESOP as “an employee benefit plan
that is described by the Employee Retirement Income Security Act of 1974 and
the Internal Revenue Code of 1986 as a stock bonus plan, or combination
stock bonus and money purchase pension plan, designed to invest primarily in
employer stock. Also called an employee share ownership plan.” Entities
should continue to account for ESOPs in accordance with ASC 718-40 or SOP
76-3. Although SOP 76-3 was not included in the Codification, entities may
continue to apply it to shares acquired by ESOPs on or before December 31,
1992.