3.2 Determining the Grant Date

ASC 718-10 — Glossary

Grant Date

The date at which a grantor and a grantee reach a mutual understanding of the key terms and conditions of a share-based payment award. The grantor becomes contingently obligated on the grant date to issue equity instruments or transfer assets to a grantee who delivers goods or renders services or purchases goods or services as a customer. Awards made under an arrangement that is subject to shareholder approval are not deemed to be granted until that approval is obtained unless approval is essentially a formality (or perfunctory), for example, if management and the members of the board of directors control enough votes to approve the arrangement. Similarly, individual awards that are subject to approval by the board of directors, management, or both are not deemed to be granted until all such approvals are obtained. The grant date for an award of equity instruments is the date that a grantee begins to benefit from, or be adversely affected by, subsequent changes in the price of the grantor’s equity shares. Paragraph 718-10-25-5 provides guidance on determining the grant date. See Service Inception Date.

ASC 718-10

Determining the Grant Date

25-5 As a practical accommodation, in determining the grant date of an award subject to this Topic, assuming all other criteria in the grant date definition have been met, a mutual understanding of the key terms and conditions of an award to an individual grantee shall be presumed to exist at the date the award is approved in accordance with the relevant corporate governance requirements (that is, by the Board or management with the relevant authority) if both of the following conditions are met:

The award is a unilateral grant and, therefore, the recipient does not have the ability to negotiate the key terms and conditions of the award with the grantor.
The key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short time period from the date of approval. A relatively short time period is that period in which an entity could reasonably complete all actions necessary to communicate the awards to the recipients in accordance with the entity’s customary practices.

For additional guidance see paragraphs 718-10-55-80 through 55-83.

Determination of Grant Date

55-80 This guidance expands on the guidance provided in paragraph 718-10-25-5.

55-81 The definition of grant date requires that a grantor and a grantee have a mutual understanding of the key terms and conditions of the share-based compensation arrangement. Those terms may be established through any of the following:

A formal, written agreement
An informal, oral arrangement
An entity’s past practice.

55-82 A mutual understanding of the key terms and conditions means that there is sufficient basis for both the grantor and the grantee to understand the nature of the relationship established by the award, including both the compensatory relationship and the equity relationship subsequent to the date of grant. The grant date for an award will be the date that a grantee begins to benefit from, or be adversely affected by, subsequent changes in the price of the grantor’s equity shares. In order to assess that financial exposure, the grantor and grantee must agree to the terms; that is, there must be a mutual understanding. Awards made under an arrangement that is subject to shareholder approval are not deemed to be granted until that approval is obtained unless approval is essentially a formality (or perfunctory). Additionally, to have a grant date for an award to an employee, the recipient of that award must meet the definition of an employee.

55-83 The determination of the grant date shall be based on the relevant facts and circumstances. For instance, a look-back share option may be granted with an exercise price equal to the lower of the current share price or the share price one year hence. The ultimate exercise price is not known at the date of grant, but it cannot be greater than the current share price. In this case, the relationship between the exercise price and the current share price provides a sufficient basis to understand both the compensatory and equity relationship established by the award; the recipient begins to benefit from subsequent changes in the price of the grantor’s equity shares. However, if the award’s terms call for the exercise price to be set equal to the share price one year hence, the recipient does not begin to benefit from, or be adversely affected by, changes in the price of the grantor’s equity shares until then. Therefore, grant date would not occur until one year hence. Awards of share options whose exercise price is determined solely by reference to a future share price generally would not provide a sufficient basis to understand the nature of the compensatory and equity relationships established by the award until the exercise price is known.

Generally, compensation cost is recognized over the requisite service period or nonemployee’s vesting period on the basis of the fair-value-based measure of the share-based payment award on the grant date (see Section 3.6 for a discussion of the requisite service period and Section 9.3 for a discussion of the nonemployee’s vesting period). The exchange between the entity and the grantee of share-based payments for goods or services begins on the service inception date, which is defined as the date on which the requisite service period or nonemployee’s vesting period begins. The service inception date is typically the grant date; however, it may precede the grant date if certain conditions are met. Accordingly, an entity may begin to recognize compensation cost before the grant date. (See Section 3.6.4 for a discussion of the conditions that must be met for the service inception date to precede the grant date for an employee award.)

For a grant date to be established, all of the following conditions must be met:

The entity and grantee have reached a mutual understanding of the key terms and conditions of the award.
The grantee begins to benefit from, or be adversely affected by, subsequent changes in the price of the entity’s equity shares for equity instruments. See Section 3.2.4 for a discussion of establishing a grant date in situations in which the exercise price is unknown. See Section 3.2.6 for a discussion of establishing a grant date for awards to be settled in a variable number of shares.
All necessary approvals have been obtained. Awards issued under a share-based payment arrangement that is subject to shareholder approval are not deemed to be granted until that approval is obtained unless approval is essentially a formality (or perfunctory). For example, if shareholder approval is required but management or the members of the board of directors control enough votes to approve the arrangement, shareholder approval is essentially a formality or perfunctory. Individual awards that are subject to approval by the board of directors, management, or both, are not considered granted until all such approvals are obtained. See Section 3.2.1 for a discussion of establishing a grant date in situations in which the awards are subject to approval by the entity’s shareholders, board of directors, or both.
For employee awards, the recipient must meet the definition of an employee. See ASC 718-10-20 for the definition of an employee and Section 2.2 for a discussion of the definition of a common law employee. Irrespective of the employment contract grant date (agreed upon between an employer and future employee), the grant date and the service inception date, as described at Section 3.6.4, cannot occur until employee services are provided as illustrated in Example 3-1.

Although formal, written agreements (e.g., plan documents, award agreements, or employment agreements) provide the best evidence of the key terms of an arrangement, oral arrangements or past practice may also establish key terms and, in some instances, may suggest that the substantive arrangement differs from the written arrangement. For example, if the written terms of a share-based payment plan provide for settlement in stock but the entity has historically settled awards in cash, that past practice may suggest that the arrangement should be accounted for as being settled in cash and should therefore be classified as a liability award, despite the terms established in the written arrangement. In addition, if all of the conditions for establishing a grant date have been met, a grant date has been established for accounting purposes even if the written terms of a share-based payment state that such a date is in the future. Similarly, unless all of the conditions for establishing a grant date have been met, a grant date has not been established for accounting purposes even if the written terms of a share-based payment state that such a date has been established.

See the following for additional discussions of reaching a mutual understanding of key terms and conditions:

Section 3.2.2 — Award in which the approval date precedes the communication date.
Section 3.2.3 — Award in which the vesting conditions are unknown.
Section 3.2.5 — Award in which a discretionary provision is included in the terms of the award.

Example 3-1

Upon signing an employment agreement on January 1, 20X1, an individual is issued stock options that only have a service condition. The options vest at the end of the third year of service on December 31, 20X3 (cliff vesting). However, the individual does not begin to work (i.e., provide service in exchange for the options) for the entity until February 15, 20X1, and therefore does not meet the definition of an employee before this date. Accordingly, provided that all other conditions for establishing a grant date have been met, the grant date does not occur until February 15, 20X1. Compensation cost would be determined on the basis of the fair-value-based measure of the options on February 15, 20X1. Because the service inception date cannot begin before the individual provides service to the entity, compensation cost is recognized ratably over the period from February 15, 20X1, through December 31, 20X3.

3.2.1 Approval

When share-based payment awards are subject to approval by an entity’s shareholders, board of directors, or both, generally a grant date is not established before such approval is granted. Before establishing a grant date for a share-based payment transaction with a grantee, an entity generally must obtain all necessary approvals unless such approvals are essentially perfunctory or a formality. Accordingly, unless management (1) controls enough votes to ensure shareholder approval (when shareholder approval is required) or controls the board of directors (when board approval is required) and (2) has approved the awards, a grant date has not been established until the necessary approvals have been obtained and all other grant-date conditions have been met.

In most cases, the key terms and conditions of awards are determined by the issuing entity’s management and approved by the board of directors (or the compensation committee of the board of directors). A grantee’s failure to formally accept the award may not preclude the grant date from being established. However, if a grantee is in a position to negotiate the key terms and conditions of its awards, a grant date cannot occur until both parties agree on those terms and conditions.

Example 3-2

On January 1, 20X1, Entity A’s management approves the issuance of 1,000 shares of restricted stock to an executive (all terms are known and communicated to the executive) in accordance with A’s executive stock incentive plan. The terms of the plan require A’s board of directors to approve all individual awards, and management does not control the board. However, on the basis of past practice, it is reasonably likely that the board will approve the award.

The board meets on March 1, 20X1, and approves the award. Therefore, if all other conditions for establishing a grant date have been met, the grant date would be March 1, 20X1. Note that even though it is likely that approval will be granted, this does not affect the determination of whether an approval is perfunctory and, therefore, of whether a grant date can be established before such approval is obtained. Rather, the approval in this example would not be considered perfunctory because management does not control the outcome of the board’s vote.

Example 3-3

Entity A’s board of directors has formally delegated to management the right to grant share-based payment awards to employees when certain conditions are met. On February 1, 20X1, A’s management approves and communicates the award of 100 stock options to a newly hired employee (all terms are known and the employee begins working for A on February 1, 20X1). Because the board has delegated to management the responsibility of granting awards, the board does not need to provide further approval for the award. However, the minutes of the board’s March 1, 20X1, meeting indicate that the award was granted by management on February 1, 20X1.

If all other conditions for establishing a grant date have been met, the grant date would be February 1, 20X1, since board approval is not required (it was merely “acknowledged” in the minutes to the board meeting), and A’s management was given the authority to award the stock options. However, A should exercise caution in determining the grant date whenever board approval is subsequently obtained, even when it is not required.

3.2.2 Communication Date

A grant date may be established on the approval date if that date precedes the date on which the award is communicated to the recipient (i.e., the communication date). ASC 718-10-25-5 provides a practical accommodation for determining a grant date and states that as long as all other criteria for establishing a grant date have been met, a mutual understanding, and therefore a grant date, is presumed to exist on the date the award is approved in accordance with the relevant corporate governance requirements if both of the following conditions are met:

The award is a unilateral grant and, therefore, the recipient does not have the ability to negotiate the key terms and conditions of the award with the grantor.
The key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short time period from the date of approval. A relatively short time period is that period in which an entity could reasonably complete all actions necessary to communicate the awards to the recipients in accordance with the entity’s customary practices.

Entities should carefully assess whether an award recipient is able to negotiate the key terms and conditions of a grant. Note that while most existing employees are generally unable to negotiate the terms of share-based payment awards that are determined by an entity’s compensation committee, new hires and senior executives may have such ability.

The definition of a “relatively short time period” is a matter of professional judgment and depends on how an entity communicates the terms and conditions of its awards to its grantees. For example, if an entity communicates the terms and conditions of its awards via an employee benefits Web site or by e-mail, a relatively short time period may be a few days or the amount of time it would reasonably take to post the information on the Web site and communicate to the grantees that the information is available. On the other hand, if the terms and conditions of the awards are usually communicated to each grantee individually, the relatively short time period may be a few weeks. However, the FASB Staff Position on which the practical accommodation guidance in ASC 718-10-25-5 was based cautioned that the concepts should not be applied by analogy to other areas.

If, in accordance with ASC 718-10-25-5, the approval date is considered to be the grant date, any change in the terms or conditions of the award between the approval date and the communication date should be accounted for as a modification of the award under ASC 718-20-35-2A through 35-4. See Chapter 6 for examples of the accounting for the modification of a share-based payment award.

3.2.3 Unknown Conditions

ASC 718-10

Example 3: Employee Share-Based Payment Award With a Performance Condition and Multiple Service Periods

55-92 The following Cases illustrate employee share-based payment awards with a performance condition (see paragraphs 718-10-25-20 through 25-21; 718-10-30-27; and 718-10-35-4) and multiple service dates:

Performance targets are set at the inception of the arrangement (Case A).
Performance targets are established at some time in the future (Case B).
Performance targets established up front but vesting is tied to the vesting of a preceding award (Case C).

55-93 Cases A, B, and C share the following assumptions:

On January 1, 20X5, Entity T enters into an arrangement with its chief executive officer relating to 40,000 share options on its stock with an exercise price of $30 per option.
The arrangement is structured such that 10,000 share options will vest or be forfeited in each of the next 4 years (20X5 through 20X8) depending on whether annual performance targets relating to Entity T’s revenues and net income are achieved.

Case A: Performance Targets Are Set at the Inception of the Arrangement

55-94 All of the annual performance targets are set at the inception of the arrangement. Because a mutual understanding of the key terms and conditions is reached on January 1, 20X5, each tranche would have a grant date and, therefore, a measurement date, of January 1, 20X5. However, each tranche of 10,000 share options should be accounted for as a separate award with its own service inception date, grant-date fair value, and 1-year requisite service period, because the arrangement specifies for each tranche an independent performance condition for a stated period of service. The chief executive officer’s ability to retain (vest in) the award pertaining to 20X5 is not dependent on service beyond 20X5, and the failure to satisfy the performance condition in any one particular year has no effect on the outcome of any preceding or subsequent period. This arrangement is similar to an arrangement that would have provided a $10,000 cash bonus for each year for satisfaction of the same performance conditions. The four separate service inception dates (one for each tranche) are at the beginning of each year.

Case B: Performance Targets Are Established at Some Time in the Future

55-95 If the arrangement had instead provided that the annual performance targets would be established during January of each year, the grant date (and, therefore, the measurement date) for each tranche would be that date in January of each year (20X5 through 20X8) because a mutual understanding of the key terms and conditions would not be reached until then. In that case, each tranche of 10,000 share options has its own service inception date, grant-date fair value, and 1-year requisite service period. The fair value measurement of compensation cost for each tranche would be affected because not all of the key terms and conditions of each award are known until the compensation committee sets the performance targets and, therefore, the grant dates are those dates.

The key differences between Case A and Case B in ASC 718-10-55-94 and 55-95 are related to when a mutual understanding of key terms and conditions has been established. The entity in Case A established performance conditions with the CEO when both parties entered the arrangement, which resulted in the establishment of a grant date at the inception of the award arrangement. The award will have four independent tranches with four separate inception dates, but the fair value of the entire award will be established on the grant date (i.e., January 1, 20X5). In Case B, a mutual understanding of key terms and conditions has not been established at the time both parties enter into the arrangement because the performance conditions associated with the award granted have not been established. The performance conditions will be established at the beginning of each year. Therefore, each of the four vesting tranches of the award will have its own service inception date and grant date at the time a performance condition is established for each tranche. In other words, the awards in Case B will have different fair values established for each vesting tranche.

Accordingly, all the key terms and conditions of the award must be known, including any vesting conditions (i.e., service or performance conditions) or market conditions. In addition, if the vesting or market conditions are too subjective or discretionary, the terms and conditions of the award may not be mutually understood (see Example 3-5).

Example 3-4

On January 1, 20X1, Entity A issues 1,000 shares of restricted stock to its employees. The shares will vest in 25 percent increments (tranches) each year over the next four years if A’s actual earnings for each year exceed its annual budgeted earnings by 10 percent (i.e., a graded vesting schedule). Entity A set its annual budget in November of the previous year.

In this scenario, a grant date has been established for only 250 of the shares on January 1, 20X1 (all other conditions for establishing a grant date must also be met). A grant date has not been established for the other 750 shares because the performance conditions for the shares have not been established yet. The grant dates for those shares will occur once A’s annual budget for the appropriate year has been established and the employee is aware of the performance target (or the performance target is communicated to the employee within a “relatively short time period” thereafter in accordance with ASC 718-10-25-5). Accordingly, the grant dates will most likely be January 1, 20X1, for the first tranche of 250 shares; November 20X1 for the second tranche of 250 shares; November 20X2 for the third tranche of 250 shares; and November 20X3 for the last tranche of 250 shares.

Example 3-5

On January 1, 20X1, Entity A issues 1,000 employee stock options. The options vest at the end of one year of service but only if the employee receives a performance rating of at least 4. Performance ratings are established at the end of the year on a scale of 1 through 5 (with 5 being the highest).

In this scenario, whether a grant date has been established on January 1, 20X1, depends on the facts and circumstances. Generally, if performance conditions are too subjective or discretionary, there is a lack of mutual understanding of the key terms and conditions of the award and, therefore, no grant date is established. If a performance condition is based on individual performance evaluations, an entity may consider the following items, among others, in determining whether it can be objectively established that the performance condition has been met (i.e., whether there has been a mutual understanding of the key terms and conditions):

Whether there is a well-established, rigorous system for performance evaluations.
Whether there are objective goals and specific criteria in place.
Whether, in addition to determining vesting of share-based payment awards, the evaluations are used for other purposes (e.g., annual raises, promotions).
Whether overall evaluations are subject to requirements that force a specific distribution (e.g., a rating of 5 is limited to a specified percentage of employees within the group).
Whether evaluations are completed by direct supervisors.

An award may contain a performance condition or market condition whose achievement depends on future events that are not within the control of the issuing entity. For example, to satisfy a performance condition, an entity may have to attain an EPS growth rate that outperforms the average EPS growth rate of a peer group in the same industry. Unlike the scenario in Example 3-4, the fact that the entity and grantee do not know the EPS growth rate that the peer group will achieve does not prevent them from mutually understanding the award’s key terms and conditions. For a grant date to be established, the performance condition or market condition must be objectively determinable and nondiscretionary.

Example 3-6

On November 1, 20X1, Entity B issues RSUs to Employee E. The RSUs will vest in 1,000 shares of common stock if (1) B’s stock price increases 15 percent from January 1, 20X2, to December 31, 20X2, and (2) E is still employed on December 31, 20X2.

As of November 1, 20X1, E understands what stock price increase must be achieved to earn the award relative to the stock price as of January 1, 20X2. Accordingly, on November 1, 20X1, a grant date may be established even if the stock price on January 1, 20X2, is unknown when the RSUs are issued because the market condition is objectively determinable and nondiscretionary.

3.2.4 Unknown Exercise Price

ASC 718-10

Example 4: Employee Share-Based Payment Award With a Service Condition and Multiple Service Periods

55-97 The following Cases illustrate the guidance in paragraph 718-10-30-12 to determine the service period for employee awards with multiple service periods:

Exercise price established at subsequent dates (Case A)
Exercise price established at inception (Case B).

Case A: Exercise Price Established at Subsequent Dates

55-98 The chief executive officer of Entity T enters into a five-year employment contract on January 1, 20X5. The contract stipulates that the chief executive officer will be given 10,000 fully vested share options at the end of each year (50,000 share options in total). The exercise price of each tranche will be equal to the market price at the date of issuance (December 31 of each year in the five-year contractual term). In this Case, there are five separate grant dates. The grant date for each tranche is December 31 of each year because that is the date when there is a mutual understanding of the key terms and conditions of the agreement — that is, the exercise price is known and the chief executive officer begins to benefit from, or be adversely affected by, subsequent changes in the price of the employer’s equity shares (see paragraphs 718-10-55-80 through 55-83 for additional guidance on determining the grant date). Because the awards’ terms do not include a substantive future requisite service condition that exists at the grant date (the options are fully vested when they are issued), and the exercise price (and, therefore, the grant date) is determined at the end of each period, the service inception date precedes the grant date. The requisite service provided in exchange for the first award (pertaining to 20X5) is independent of the requisite service provided in exchange for each consecutive award. The terms of the share-based compensation arrangement provide evidence that each tranche compensates the chief executive officer for one year of service, and each tranche shall be accounted for as a separate award with its own service inception date, grant date, and one-year service period; therefore, the provisions of paragraph 718-10-35-8 would not be applicable to this award because of its structure.

The conclusion in Case A (see ASC 718-10-55-98 above) is that the stock options granted to the CEO will have five separate grant dates established on December 31 of each year. The grant date for each tranche is December 31 of each year because that is when the exercise price will be known for the fully vested stock options that are annually awarded to the CEO. Accordingly, December 31 is the date on which there is a mutual understanding of key terms and conditions (provided that all other terms and conditions are known) between the grantee (i.e., the CEO) and the grantor (i.e., the entity). In addition to their five separate grant dates, the fully vested stock options have five separate service inception dates, which are one year before each grant date. Accordingly, in such situations, the entity may be required to begin recognizing compensation cost before the grant date. From the service inception date until the grant date, the entity remeasures the options at their fair-value-based measure at the end of each reporting period on the basis of the assumptions that exist on those dates. Once the grant date is established, the entity discontinues remeasuring the options at the end of each reporting period. That is, the final measure of compensation cost is based on the fair-value-based measure on the grant date. (See Section 3.6.4 and Example 6 in ASC 718-10-55-107 through 55-115 for a discussion and examples of the conditions that must be met for a service inception date to precede the grant date.) Since each tranche has a separate grant date at one-year intervals and separate service inception dates at one-year intervals, the grantor does not have the option to apply either the straight-line attribution method or the accelerated attribution method when recognizing compensation cost (as discussed in ASC 718-10-35-8) that is associated with the options awarded.

Example 3-7

On January 1, 20X1, Entity A issues 1,000 employee stock options that vest at the end of one year of service (cliff vesting). All terms of the options are known except for the exercise price, which is set equal to the lower of the market price of A’s shares on January 1, 20X1, or its market price on December 31, 20X1 (i.e., the employee is given a look-back option).

In this scenario, a grant date has been established for January 1, 20X1, if all other conditions for establishing a grant date have also been met. In a manner consistent with ASC 718-10-55-83, while the ultimate exercise price is not known, it cannot be greater than the current market price of A’s shares. In this case, the relationship between the exercise price and the current market price of A’s shares constitutes a sufficient basis for understanding both the compensatory and the equity relationships established by the award. While the employee may not be adversely affected by any decreases in A’s share price, the employee will begin to benefit from subsequent increases in the price of A’s shares.

A common issue observed in practice is related to whether a grant date has been established when a nonpublic entity issues stock options to grantees and the valuation of the entity’s common shares is not completed until after the issuance date. Generally, the terms of the option agreement require that the exercise price of the options equal the fair value of a common share of the entity on the issuance date. To determine the fair value of its common shares, the entity will often hire an independent expert to perform a valuation of the entity, which will be based solely on information available as of the issuance date. However, since the valuation is not completed until after the issuance date, the entity may question whether a grant date has been established for the stock options.

An entity’s need to finalize the valuation of the underlying common shares as of a specific date (and therefore to set the exercise price of the award) would generally not prevent the entity from establishing a grant date for a share-based payment award with a grantee if all other conditions for establishing a grant date have been met. The result of the valuation, based solely on information available as of the issuance date, should be identical, regardless of whether the valuation work is completed on the issuance date (i.e., all of the work is hypothetically performed instantaneously) or as of a subsequent date.

One factor that could cause uncertainty about whether a grant date is established is the amount of time it takes, after the issuance of the award, to complete the valuation. A lengthy period between the purported valuation date and the completion of the valuation work may call into question whether an entity has used hindsight in selecting the underlying assumptions. Note that even if the final valuation is completed after the grant date, an entity is required to use the information available as of the established grant date. In other words, to prevent biased estimates, an entity should not factor hindsight into the valuation.

Note also that if an entity were to change the original terms of the award after the established grant date but before completion of the valuation, the entity would account for the changes as a modification. See Chapter 6 for a discussion of the accounting for a modification of a share-based payment award.

3.2.5 Discretionary Provisions

If an entity that issues share-based payment awards can, in the future, exercise discretion regarding any of the key terms or conditions that were established when the awards were issued, a grant date may not have been established. The existence of such discretion may indicate uncertainty about whether a mutual understanding of the key terms and conditions was reached. For example, specific and objective performance metrics for determining vesting could be established when the awards were issued, but the entity may have discretion to adjust the performance metrics or the items that comprise the performance metrics at the end of the performance period. If there are few or no limitations on when and how such adjustments are to be made, a grantee may not have a sufficient understanding of the performance condition (i.e., the vesting condition) because the entity at its discretion could adjust it at the end of the performance period. By contrast, the existence of a provision that requires specific and objective adjustments to be made upon the occurrence of stated triggering events would most likely not, by itself, indicate that the key terms and conditions of the award are uncertain. A determination of whether a grantee sufficiently understands the award’s key terms and conditions should be based on the facts and circumstances (e.g., past practice, other communications).

In addition, an award may contain a clawback provision that gives the entity discretion to determine how much of the award is returned if the clawback provision is violated (e.g., a noncompete or nonsolicitation provision is violated). Even if the event or events that trigger the clawback provision are objective and specific, the entity should evaluate whether its ability to determine the amount subject to the clawback is a “key” term or condition that might affect whether a mutual understanding is reached.

A “negative-discretion” provision is a common feature of share-based payment plans that allows management or the board of directors to reduce the number of awards due to a grantee. For example, a plan might state that 100 awards will be earned if EBITDA increases by at least 10 percent each year over a three-year period, with more or fewer awards issued for performance above or below that threshold. A negative-discretion provision would give management or the board of directors the discretion to reduce the number of awards below the amount determined by the plan’s stated terms at the end of the performance period.

Entities must carefully consider whether a negative-discretion provision in a share-based payment plan will preclude the entity from establishing a grant date under ASC 718 until management or the board of directors determines the number of awards due to a grantee at the end of the performance period. Since a criterion for establishing a grant date for a share-based payment transaction with a grantee is that the entity and grantee reach a mutual understanding of the key terms and conditions of the share-based payment award, entities should consider whether a plan’s negative-discretion provision is a “key” term or condition that could result in uncertainty in the number of awards to be earned. Factors to consider, among others, include the following:

Management’s intent and the purpose of the provision, including circumstances in which management believes it will exercise its right under the negative-discretion provision.
Whether, in the past, management has exercised its right under the negative-discretion provision.
Frequency of use of the negative-discretion provision, including when it was used and the reasons for using it.
Grantees’ awareness of the negative-discretion provision. All communications to grantees, including verbal representations, should be considered.

Example 3-8

An employee is awarded 100 shares of restricted stock on January 1, 20X7. The shares vest on the basis of a service condition and a performance condition. While both the service and performance conditions have been specified, management retains the discretion to increase or decrease the number of shares that vest by up to 25 percent on the basis of the entity’s performance. Management has not provided guidance on what performance criteria would trigger the use of discretion. Furthermore, management has previously exercised discretion provisions for similar share-based payment awards granted to employees.

The discretion provision will not affect the entity’s ability to establish a grant date for the 75 percent of shares that are not subject to the discretion provision and, if all the other criteria for establishing a grant date have been met, a grant date has been established on January 1, 20X7, for these 75 shares. However, for the remaining 25 percent of shares that are subject to the discretion provision, these 25 shares do not have the same terms and conditions as the other 75 shares. Thus, the entity should separately evaluate the 25 shares subject to the discretion provision to determine whether the discretion provision for those shares affects the entity’s ability to establish a grant date (i.e., a grant date has most likely not been established for the 25 shares).

3.2.6 Awards Settled in a Variable Number of Shares

As Chapter 5 discusses in more detail, while share-based payment awards subject to ASC 718 are outside the scope of ASC 480, ASC 718-10-25-7 requires entities to apply the classification criteria in ASC 480-10-25 and in ASC 480-10-15-3 and 15-4 unless ASC 718-10-25-8 through 25-19A require otherwise. As a result, certain awards may be classified as a liability because an entity has an obligation to issue a variable number of shares that are based on a fixed monetary amount known at inception. In this circumstance, the grantee will not begin to benefit from, or be adversely affected by, subsequent changes in the price of the entity’s equity shares until the number of shares is determined. However, because the liability is based on a fixed amount, we do not believe that the ability to benefit from, or be adversely affected by, subsequent changes in the price of the entity’s equity shares is necessary to establish a grant date. Thus, if all other grant date criteria have been met, an entity would not be precluded from establishing a grant date for share-based liabilities that are based on a fixed monetary amount known at inception.

Confidential and Proprietary — for Use Solely by Authorized Personnel

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.