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Chapter 2 — Scope

2.11 Unrelated Entity Awards

2.11 Unrelated Entity Awards

ASC 815-10
Options Granted to Employees and Nonemployees
45-10 Subsequent changes in the fair value of an option that was granted to a grantee and is subject to or became subject to this Subtopic shall be included in the determination of net income. (See paragraphs 815-10-55-46 through 55-48A and 815-10-55-54 through 55-55 for discussion of such an option.) Changes in fair value of the option award before vesting shall be characterized as compensation cost in the grantor’s income statement. Changes in fair value of the option award after vesting may be reflected elsewhere in the grantor’s income statement.
Equity Options Issued to Employees and Nonemployees
55-46 Some entities issue stock options to grantees in which the underlying shares are stock of an unrelated entity. Consider the following example:
  1. Entity A awards an option to a grantee.
  2. The terms of the option award provide that, if the grantee continues to provide services to Entity A for 3 years, the grantee may exercise the option and purchase 1 share of common stock of Entity B, a publicly traded entity, for $10 from Entity A.
  3. Entity B is unrelated to Entity A and, therefore, is not a subsidiary or accounted for by the equity method.
55-47 The option award in this example is not within the scope of Topic 718 because the underlying stock is not an equity instrument of the grantor.
55-48 The option award is not subject to Topic 718. Rather, the option award in the example in paragraph 815-10-55-46 meets the definition of a derivative instrument in this Subtopic and, therefore, should be accounted for by the grantor as a derivative instrument under this Subtopic. After vesting, the option award would continue to be accounted for as a derivative instrument under this Subtopic.

Footnotes

5
Because the stock options are not within the scope of ASC 718, “fair value” in this context refers to fair value as determined in accordance with ASC 820, not to fair-value-based measurement under ASC 718.
6
In this scenario, an entity should apply ASC 815-10-45-10 and ASC 815-10-55-46 through 55-48 to the stock options by analogy rather than directly because the stock options involve an underlying that is a non-publicly-traded share of an unrelated entity, while the stock options in ASC 815-10-45-10 and ASC 815-10-55-46 through 55-48 involve an underlying that is a publicly traded share of an unrelated entity (and that therefore meets the definition of a derivative, since it can be net settled in accordance with ASC 815-10-15-83). Often, option awards on non-publicly-traded shares of an unrelated entity will not meet the net settlement criteria of ASC 815-10-15-83 because of the lack of (1) explicit net settlement, (2) a market mechanism to net settle the options, and (3) delivery of shares that are readily convertible to cash (since the shares are not publicly traded). However, because there is no specific guidance in the accounting literature on accounting for stock options that are indexed to and settled in shares of an unrelated non-publicly-traded entity, the fair value accounting in ASC 815-10-45-10 and ASC 815-10-55-46 through 55-48 is appropriate by analogy (since the stock options are outside the scope of ASC 718, as discussed above), even though they do not meet the definition of a derivative in ASC 815.
7
Because the instruments are not within the scope of ASC 718, “fair value” in this context refers to fair value as determined in accordance with ASC 820, not to fair-value-based measurement under ASC 718.