4.7 Nonvested Shares

As discussed in Section 3.3, a nonvested share, commonly known as restricted stock, is an award that a grantee earns once the grantee has provided the good or service required under the terms of the share-based payment arrangement. Further, as discussed throughout this Roadmap, the measurement basis under ASC 718 is a fair-value-based measurement, which excludes the effects of service and performance conditions that are vesting conditions. Therefore, restricted stock (with only service and performance conditions) should generally be measured at the fair value of the entity’s common stock as if the restricted stock were vested and issued on the grant date (an entity may need to adjust the fair value for dividends, as discussed below). It would not be appropriate for the fair value of the entity’s common stock to be discounted to reflect that the shares being valued are not vested.

While service and performance vesting conditions do not affect the fair-value-based measure of restricted stock, the initial measurement of restricted stock could be affected by factors such as a market condition, as discussed in ASC 718-10-30-14; a postvesting restriction, as discussed in ASC 718-10-30-10; or whether the grantee is entitled to dividends. As indicated in paragraph B93 of FASB Statement 123(R), if a grantee holding a restricted stock award is not entitled to receive dividends (i.e., the grantee does not have the right of a normal shareholder), the fair-value-based measure of the award would be lower than the fair value of a normal equity share if the entity is expected to pay dividends. An entity should estimate the fair-value-based measure of restricted stock that does not entitle the grantee to dividends during the service (vesting) period by reducing the fair value of its common stock by the present value of expected dividends to be paid before the end of the service (vesting) period. The present value of the expected dividends should be calculated by using an appropriate risk-free interest rate as the discount rate. See Section 4.9.2.4 for a discussion of how dividends paid on grantee stock options during the expected term affect the valuation of such awards, and see Section 12.4 for a discussion of how dividend-paying restricted stock awards affect the computation of EPS.