3.1 General Recognition Principles
ASC 718-10
Recognition Principle for Share-Based Payment Transactions
25-2 An entity shall recognize the goods acquired or services received in a share-based payment transaction when it obtains the goods or as services are received, as further described in paragraphs 718-10-25-2A through 25-2B. The entity shall recognize either a corresponding increase in equity or a liability, depending on whether the instruments granted satisfy the equity or liability classification criteria (see paragraphs 718-10-25-6 through 25-19A).
25-2A
Employee services themselves are not recognized before they
are received. As the services are consumed, the entity shall
recognize the related cost. For example, as services are
consumed, the cost usually is recognized in determining net
income of that period, for example, as expenses incurred for
employee services. In some circumstances, the cost of
services may be initially capitalized as part of the cost to
acquire or construct another asset, such as inventory, and
later recognized in the income statement when that asset is
disposed of or consumed. This Topic refers to recognizing
compensation cost rather than compensation expense because
any compensation cost that is capitalized as part of the
cost to acquire or construct an asset would not be
recognized as compensation expense in the income
statement.
25-2B
Transactions with nonemployees in which share-based payment
awards are granted in exchange for the receipt of goods or
services may involve a contemporaneous exchange of the
share-based payment awards for goods or services or may
involve an exchange that spans several financial reporting
periods. Furthermore, by virtue of the terms of the exchange
with the grantee, the quantity and terms of the share-based
payment awards to be granted may be known or not known when
the transaction arrangement is established because of
specific conditions dictated by the agreement (for example,
performance conditions). Judgment is required in determining
the period over which to recognize cost, otherwise known as
the nonemployee’s vesting period.
25-2C This guidance does not
address the period(s) or the manner (that is, capitalize
versus expense) in which an entity granting the share-based
payment award (the purchaser or grantor) to a nonemployee
shall recognize the cost of the share-based payment award
that will be issued, other than to require that an asset or
expense be recognized (or previous recognition reversed) in
the same period(s) and in the same manner as if the grantor
had paid cash for the goods or services instead of paying
with or using the share-based payment award. A share-based
payment award granted to a customer shall be reflected as a
reduction of the transaction price and, therefore, of
revenue as described in paragraph 606-10-32-25 unless the
payment to the customer is in exchange for a distinct good
or service, in which case the guidance in paragraph
606-10-32-26 shall apply.
A share-based payment arrangement is an exchange between an entity and a grantee
who provides goods or services. The entity
recognizes the effect of that exchange in the
balance sheet and income statement as goods are
delivered or services are rendered. The
share-based payment transaction is measured on the
basis of the fair value (or sometimes the
calculated or intrinsic value) of the equity
instrument issued. While an entity uses the
fair-value-based measurement method in ASC 718 to
determine the value of a share-based payment, that
method does not take into account the effects of
vesting conditions and other types of features
that would be included in a true fair value
measurement. The objectives of accounting for
equity instruments issued to grantees are to (1)
measure the cost of the goods or services received
(i.e., compensation cost) in exchange for an award
of equity instruments on the basis of the
fair-value-based measure of the award on the grant
date and (2) recognize that measured compensation
cost in the financial statements over the
requisite service period or the nonemployee’s
vesting period. The term “nonemployee’s vesting
period” is used throughout ASC 718 and this
publication. Compensation cost for a nonemployee’s
award is recognized over the nonemployee’s vesting
period(s) (i.e., the same period(s) are used as if
the grantor had paid cash for the goods or
services instead of paying with the share-based
payment award).
The classification of the award dictates the corresponding credit in the balance sheet and affects the amount of compensation cost recognized over the requisite service or the nonemployee’s vesting period. If the award is classified as equity, the corresponding credit is recorded in equity — typically as paid-in capital. If the award is classified as a liability, the corresponding credit is recorded as a share-based liability. Equity-classified awards are generally recognized as compensation cost over the requisite service or nonemployee’s vesting period on the basis of the fair-value-based measure of the award on the grant date. On the other hand, liability-classified awards are remeasured at their fair-value-based amount in each reporting period until settlement. That is, the changes in the fair-value-based measure of the liability at the end of each reporting period are recognized as compensation cost, either immediately or over the remaining requisite service period or nonemployee’s vesting period, depending on the vested status of the award. See Chapter 7 for a discussion of the differences between the accounting for equity-classified awards and that for liability-classified awards.
Like other compensation costs (e.g., cash compensation), those associated with share-based payment awards are usually recognized as an expense. In some instances, such costs may be capitalized as part of an asset and later recognized as an expense. For example, if a grantee’s compensation is included in the cost of acquiring or constructing an asset, the compensation cost arising from share-based payment awards would be capitalized in the same manner as cash compensation. The capitalized compensation cost would subsequently be recognized as cost of goods sold or as depreciation or amortization expense.