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Chapter 5 — Classification

5.3 Share Repurchase Features

5.3 Share Repurchase Features

ASC 718-10
25-9 Topic 480 does not apply to outstanding shares embodying a conditional obligation to transfer assets, for example, shares that give the grantee the right to require the grantor to repurchase them for cash equal to their fair value (puttable shares). A put right may be granted to the grantee in a transaction that is related to a share-based compensation arrangement. If exercise of such a put right would require the entity to repurchase shares issued under the share-based compensation arrangement, the shares shall be accounted for as puttable shares. A puttable (or callable) share awarded to a grantee as compensation shall be classified as a liability if either of the following conditions is met:
  1. The repurchase feature permits the grantee to avoid bearing the risks and rewards normally associated with equity share ownership for a reasonable period of time from the date the good is delivered or the service is rendered and the share is issued. A grantee begins to bear the risks and rewards normally associated with equity share ownership when all the goods are delivered or all the service has been rendered and the share is issued. A repurchase feature that can be exercised only upon the occurrence of a contingent event that is outside the grantee’s control (such as an initial public offering) would not meet this condition until it becomes probable that the event will occur within the reasonable period of time.
  2. It is probable that the grantor would prevent the grantee from bearing those risks and rewards for a reasonable period of time from the date the share is issued.
For this purpose, a period of six months or more is a reasonable period of time.
25-10 A puttable (or callable) share that does not meet either of those conditions shall be classified as equity (see paragraph 718-10-55-85).
Classification of Certain Awards With Repurchase Features
55-84 The following paragraph further explains the guidance in paragraphs 718-10-25-9 through 25-12.
55-85 An entity may, for example, grant shares under a share-based compensation arrangement that the grantee can put (sell) to the grantor (the entity) shortly after the vesting date for cash equal to the fair value of the shares on the date of repurchase. That award of puttable shares would be classified as a liability because the repurchase feature permits the grantee to avoid bearing the risks and rewards normally associated with equity share ownership for a reasonable period of time from the date the share is issued (see paragraph 718-10-25-9(a)). Alternatively, an entity might grant its own shares under a share-based compensation arrangement that may be put to the grantor only after the grantee has held them for a reasonable period of time after vesting but at a fixed redemption amount. Those puttable shares also would be classified as liabilities under the requirements of this Topic because the repurchase price is based on a fixed amount rather than variations in the fair value of the grantor’s shares. The grantee cannot bear the risks and rewards normally associated with equity share ownership for a reasonable period of time because of that redemption feature. However, if a share with a repurchase feature gives the grantee the right to sell shares back to the entity for a fixed amount over the fair value of the shares at the date of repurchase, paragraph 718-20-35-7 requires that the fixed amount over the fair value be recognized and attributed as additional compensation cost over the employee’s requisite service period (with a corresponding liability being accrued). The fixed amount over the fair value of a nonemployee award should be recognized as additional compensation cost over the vesting period (with a corresponding liability being accrued) in accordance with paragraph 718-10-25-2C.

Footnotes

1
If the repurchase feature is measured at fair value, the employee bears the risks and rewards of equity share ownership by holding the shares for six months or more after the shares are issued or issuable (i.e., the shares become “mature”). If the repurchase feature is not measured at fair value, the employee may not bear the risks and rewards of equity share ownership as long as the repurchase feature is outstanding.
2
The probability analysis for a fair value repurchase feature is performed for the six-month “window” that the shares are “immature” (i.e., within six months of vesting). For a non–fair value repurchase feature, the analysis is performed for the entire period that the repurchase feature is outstanding. The analysis is generally performed on an individual-grantee basis and must be updated continually.