3.3 Nonvested Shares Versus Restricted Shares

ASC 718-10 — Glossary

Nonvested Shares

Shares that an entity has not yet issued because the agreed-upon consideration, such as the delivery of specified goods or services and any other conditions necessary to earn the right to benefit from the instruments, has not yet been satisfied. Nonvested shares cannot be sold. The restriction on sale of nonvested shares is due to the forfeitability of the shares if specified events occur (or do not occur).

Restricted Share

A share for which sale is contractually or governmentally prohibited for a specified period of time. Most grants of shares to grantees are better termed nonvested shares because the limitation on sale stems solely from the forfeitability of the shares before grantees have satisfied the service, performance, or other condition(s) necessary to earn the rights to the shares. Restricted shares issued for consideration other than for goods or services, on the other hand, are fully paid for immediately. For those shares, there is no period analogous to an employee’s requisite service period or a nonemployee’s vesting period during which the issuer is unilaterally obligated to issue shares when the purchaser pays for those shares, but the purchaser is not obligated to buy the shares. The term restricted shares refers only to fully vested and outstanding shares whose sale is contractually or governmentally prohibited for a specified period of time. Vested equity instruments that are transferable to a grantee’s immediate family members or to a trust that benefits only those family members are restricted if the transferred instruments retain the same prohibition on sale to third parties. See Nonvested Shares.

A nonvested share is an award that a grantee earns once the grantee has provided the requisite goods or services as specified under the terms of the share-based payment arrangement (i.e., once the vesting conditions are met). For example, a grantee may be issued shares of common stock but may not be able to retain the shares unless the grantee provides three years of service (i.e., a service condition) and revenue has grown by a specified percentage during that three-year period (i.e., a performance condition). If the grantee fails to provide the required three years of service, or the revenue growth target is not met, the shares would be forfeited to the entity.

While a nonvested share is often referred to as “restricted stock,” it should not be confused with restricted shares, which ASC 718-10-20 defines as “fully vested and outstanding shares whose sale is . . . prohibited for a specified period of time.” For example, a grantee may be issued a fully vested share but may be restricted from selling it for a two-year period. If the grantee ceases to provide goods or services before the end of the two-year period, the grantee retains the share. However, the grantee’s ability to sell the share remains contingent on the lapse of the two-year period.

When determining a share-based payment award’s fair-value-based measure, an entity should generally consider restrictions that are in effect after a grantee has vested in the award, such as the inability to transfer or sell vested shares for a specified period. This restriction may result in a discount relative to the fair-value-based measure of the shares without a postvesting restriction. See Section 4.8.

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