2.9 Separate Financial Statements

The accounting for share-based payment transactions in the separate financial statements of each entity within a consolidated group is somewhat complicated. Before FASB Statement 123(R) (codified in ASC 718), entities applied the guidance in Question 4 of FASB Interpretation 44 and Issues 21 and 22 of EITF Issue 00-23 when accounting for such transactions. Although FASB Statement 123(R) (codified in ASC 718) subsequently superseded and nullified Interpretation 44 and Issue 00-23, entities should continue to analogize to this guidance when accounting for consolidated-group share-based payment transactions.

The share-based payment awards of a consolidated subsidiary that are issued to employees of that subsidiary and are indexed to and settled in equity of the subsidiary’s parent are within the scope of ASC 718. Although ASC 718 does not specifically address such awards, they would be within the scope of ASC 718 by analogy to paragraph 14 of Interpretation 44. Paragraph 14 states, in part:

[A]n exception is made to require the application of Opinion 25 to stock compensation based on stock of the parent company granted to employees of a consolidated subsidiary for purposes of reporting in the separate financial statements of that subsidiary. The exception applies only to stock compensation based on stock of the parent company (accounted for under Opinion 25 in the consolidated financial statements) granted to employees of an entity that is part of the consolidated group. [Emphasis added]

Under the exception in Interpretation 44, an entity treated the stock of the parent entity as though it were the stock of the consolidated subsidiary when reporting in the separate financial statements of the subsidiary. We believe that the same analogy can be applied to awards granted to the subsidiary’s nonemployee providers of goods or services. The exception did not, however, extend to share-based payment awards “granted (a) to the subsidiary’s employees based on the stock of another subsidiary in the consolidated group or (b) by the subsidiary to employees of the parent or another subsidiary.” Therefore, the share-based payment awards of a consolidated subsidiary that reports separate financial statements and grants such awards to employees or nonemployees of the parent or another subsidiary, and that are indexed to and settled in the equity of the consolidated subsidiary, are not within the scope of ASC 718.

Neither Interpretation 44 nor ASC 718 specifically addresses the accounting for these awards. Such guidance is contained in Issue 21 of EITF Issue 00-23. The conclusion in Issue 21 of EITF Issue 00-23 states that the parent (controlling entity) can always direct subsidiaries (controlled entities) within the consolidated group to grant share-based payment awards to the parent’s employees and to the employees of other subsidiaries in the consolidated group. Therefore, in its separate financial statements, the subsidiary granting the awards measures the awards at their fair-value-based measure as of the grant date. That amount is recognized as a dividend from the subsidiary to the parent; a corresponding amount is recognized as equity. The EITF’s reasoning is as follows:

Because the controlling entity has the discretion to require entities it controls to enter into a variety of transactions, recognizing the transaction as a dividend more closely mirrors the economics of the arrangement because it will not be clear that the entity granting the stock compensation has received goods or services in return for that grant, and if so, whether the fair value of those goods or services approximates the value of the equity awards.

Likewise, share-based payment awards that are issued to employees or nonemployees of a subsidiary and indexed to and settled in another subsidiary’s equity are also not within the scope of ASC 718. In its separate financial statements, the subsidiary issuing the awards would apply the guidance in Issue 21 of EITF Issue 00-23 because the parent (controlling entity) can always direct subsidiaries (controlled entities) within the consolidated group to grant share-based payment awards to its employees or nonemployees and to the employees or nonemployees of other subsidiaries in the consolidated group. In theory, the subsidiary granting the share-based payment award is accounting for the grant as if the awards were issued to the parent and as if, after receiving the awards, the parent issues the same awards to another subsidiary within the consolidated group. Therefore, in its separate financial statements, the subsidiary issuing the awards measures the awards at their fair-value-based measure as of the grant date. That amount is recognized as a dividend from the subsidiary to the parent; a corresponding amount is recognized as equity.

In addition, in its separate financial statements, the subsidiary whose employees or nonemployees are receiving the awards would apply the guidance in Issue 22 of EITF Issue 00-23, which specifies that the awards are accounted for as compensation cost on the basis of their fair value. We believe that in a manner similar to the entity issuing the awards, if the subsidiary whose employees or nonemployees are receiving the awards has no obligation to settle those awards, it is acceptable to measure the awards at their fair-value-based measure as of the grant date. The subsidiary would also account for the offsetting entry to compensation cost as a credit to equity (i.e., a capital contribution from or on behalf of the parent). By contrast, if the subsidiary whose employees or nonemployees are receiving the awards has an obligation to settle those awards, the awards generally would be accounted for under ASC 815 (see Section 2.11).

The table below summarizes the accounting for awards in a parent’s consolidated financial statements and the separate financial statements of its wholly owned subsidiaries, A and B, in three scenarios.

Awards	Parent’s Consolidated Financial Statements	Subsidiary A’s Separate Financial Statements	Subsidiary B’s Separate Financial Statements
Share-based payment awards issued to employees/nonemployees of A and indexed to and settled in the parent’s equity	The awards are accounted for as share-based payment awards within the scope of ASC 718.	The awards are within the scope of ASC 718. Compensation cost for the awards is recognized at their fair-value-based measure as of the grant date. If A does not reimburse the parent for the awards, it makes an offsetting entry to equity to represent a capital contribution by the parent.	N/A
Share-based payment awards issued to the parent’s employees/nonemployees and indexed to and settled in A’s equity	The awards are accounted for as share-based payment awards within the scope of ASC 718.	The awards are not within the scope of ASC 718. Subsidiary A measures the awards at their fair-value-based measure as of the grant date and recognizes that amount as a dividend from itself to the parent; it recognizes a corresponding amount as equity.	N/A
Share-based payment awards issued to employees/nonemployees of B and indexed to and settled in A’s equity	The awards are accounted for as share-based payment awards within the scope of ASC 718.	The awards are not within the scope of ASC 718. Subsidiary A accounts for them as if (1) they were issued to the parent and (2) the parent then issued them to B. Subsidiary A measures the awards at their fair-value-based measure as of the grant date and recognizes that amount as a dividend from itself to the parent; it recognizes a corresponding amount as equity.	Subsidiary B recognizes compensation cost for the awards at their fair-value-based measure as of the grant date if it does not have an obligation to settle the awards. It accounts for the offsetting entry to compensation cost as a credit to equity (i.e., a capital contribution from or on behalf of the parent). If it has an obligation to settle the awards, it would generally apply ASC 815.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.