3.5 Market Condition
ASC 718-10 — Glossary
Market Condition
A condition affecting the exercise price, exercisability, or other pertinent factors used in determining the fair value of an award under a share-based payment arrangement that relates to the achievement of either of the following:
- A specified price of the issuer’s shares or a specified amount of intrinsic value indexed solely to the issuer’s shares
- A specified price of the issuer’s shares in terms of a similar (or index of similar) equity security (securities). The term similar as used in this definition refers to an equity security of another entity that has the same type of residual rights. For example, common stock of one entity generally would be similar to the common stock of another entity for this purpose.
ASC 718-10
Market Conditions
30-14 Some awards contain a market condition. The effect of a market condition is reflected in the grant-date fair value of an award. (Valuation techniques have been developed to value path-dependent options as well as other options with complex terms. Awards with market conditions, as defined in this Topic, are path-dependent options.) Compensation cost thus is recognized for an award with a market condition provided that the good is delivered or the service is rendered, regardless of when, if ever, the market condition is satisfied.
Market, Performance, and Service Conditions
30-27 Performance or service conditions that affect vesting are not reflected in estimating the fair value of an award at the grant date because those conditions are restrictions that stem from the forfeitability of instruments to which grantees have not yet earned the right. However, the effect of a market condition is reflected in estimating the fair value of an award at the grant date (see paragraph 718-10-30-14). For purposes of this Topic, a market condition is not considered to be a vesting condition, and an award is not deemed to be forfeited solely because a market condition is not satisfied.
Recognition of Employee Compensation Costs Over the
Requisite Service Period
35-4 An entity shall reverse previously recognized compensation cost for an award with a market condition only if the requisite service is not rendered.
Implementation Guidance
55-7 Note that performance and service conditions are vesting conditions for purposes of this Topic. Market conditions are not vesting conditions for purposes of this Topic but market conditions may affect exercisability of an award. Market conditions are included in the estimate of the grant-date fair value of awards (see paragraphs 718-10-55-64 through 55-66).
Market, Performance, and Service Conditions That Affect Vesting and Exercisability
55-61 Analysis of the market, performance, or service conditions (or any combination thereof) that are explicit or implicit in the terms of an award is required to determine the employee’s requisite service period or the nonemployee’s vesting period over which compensation cost is recognized and whether recognized compensation cost may be reversed if an award fails to vest or become exercisable (see paragraph 718-10-30-27). If exercisability or the ability to retain the award (for example, an award of equity shares may contain a market condition that affects the grantee’s ability to retain those shares) is based solely on one or more market conditions compensation cost for that award is recognized if the grantee delivers the promised good or renders the service, even if the market condition is not satisfied. If exercisability (or the ability to retain the award) is based solely on one or more market conditions, compensation cost for that award is reversed if the grantee does not deliver the promised good or render the service, unless the market condition is satisfied prior to the end of the employee’s requisite service period or the nonemployee’s vesting period, in which case any unrecognized compensation cost would be recognized at the time the market condition is satisfied. If vesting is based solely on one or more performance or service conditions, any previously recognized compensation cost is reversed if the award does not vest (that is, the good is not delivered or the service is not rendered or the performance condition is not achieved). Examples 1 through 4 (see paragraphs 718-20-55-4 through 55-50) provide illustrations of awards in which vesting is based solely on performance or service conditions.
55-62 Vesting or exercisability may be conditional on satisfying two or more types of conditions (for example, vesting and exercisability occur upon satisfying both a market and a performance or service condition). Vesting also may be conditional on satisfying one of two or more types of conditions (for example, vesting and exercisability occur upon satisfying either a market condition or a performance or service condition). Regardless of the nature and number of conditions that must be satisfied, the existence of a market condition requires recognition of compensation cost if the good is delivered or the service is rendered, even if the market condition is never satisfied.
Unlike a service or performance condition, a market condition is not a vesting condition but is directly factored into the fair-value-based measure of an award. See Section 4.5 for a discussion of how a market condition affects the valuation of a share-based payment award. Examples of market conditions include:
- The achievement of a specified price of an entity’s stock.
- A specified return on an entity’s stock (often referred to as total shareholder return, or TSR) that exceeds the average return of a peer group of entities or a specified index (such as the S&P 500).
- A percentage increase in an entity’s stock price that is greater than the average percentage increase of the stock price of a peer group of entities or a specified index.
-
A specified return on an entity’s stock based on invested capital (such as a realized IRR or multiples of invested capital for private-equity investors).
-
A specified market capitalization.
Certain awards contain only a market condition. That is, they do not specify a
service or vesting period but require the grantee
to provide goods or services until the market
condition is met. When an employee award contains
only a market condition, the entity must use a
derived service period to determine whether the
employee has provided the requisite service to
earn the award. While determining the derived
service period applies to employee awards only,
for certain nonemployee awards, an entity may
analogize to the guidance on calculating a derived
service period when assessing whether it should
recognize compensation cost. See Section
3.6.3 for a discussion of an employee’s
derived service period.
If an employee does not remain employed for the derived
service period (i.e., the employee forfeits the award during the derived service
period), the employee has not earned (i.e., has not vested in) the award. An entity
accrues compensation cost over the derived service period if the requisite service
is rendered; however, the entity will reverse any previously
recognized compensation cost if the employee leaves before the completion of the
derived service period. This is true unless the market condition affects the
employee’s ability to exercise or retain the award and the market condition is
satisfied before the end of the derived service period (i.e., the market condition
is satisfied sooner than originally anticipated and the employee is still employed
as of the actual date of satisfaction). In that case, any unrecognized compensation
cost is recognized immediately when the market condition is satisfied. However, if
an entity instead determines that the market condition is expected to be satisfied
later than originally anticipated, the entity would not
revise its estimate of the requisite service period.
Conversely, if an employee does remain employed for the
derived service period, the employee has earned
(i.e., vested in) the award. In this circumstance,
recognition of compensation cost will depend on
whether the award is classified as equity or
liability. For an equity-classified award, an
entity will not reverse
any previously recognized compensation cost even
if the market condition is never satisfied. For a
liability-classified award (see Section
7.2.3), although the effect of a market
condition is reflected in the award’s
fair-value-based measure, its remeasurement is
performed at the end of each reporting period
until settlement. Therefore, even if the goods and
services are rendered for a liability-classified
award, the final compensation cost will be zero if
the award is not earned because a market condition
was not satisfied (i.e., its fair-value-based
measure would be zero upon the date of
settlement). In addition, cumulative compensation
cost recognized for a liability-classified award
that was modified from an equity-classified award
cannot be less than the grant-date fair value of
the original equity-classified award unless, as of
the modification date, vesting of the original
award was not probable. See Section
6.8.1 for more information.