5.8 Awards That Become Subject to Other Guidance
ASC 718-10
Awards May Become Subject to Other Guidance
35-9 Paragraphs 718-10-35-10 through 35-14 are intended to apply to those instruments issued in share-based payment transactions with employees and nonemployees accounted for under this Topic, and to instruments exchanged in a business combination for share-based payment awards of the acquired business that were originally granted to grantees of the acquired business and are outstanding as of the date of the business combination.
35-9A Paragraph superseded by
Accounting Standards Update No. 2020-06.
35-10 A freestanding financial
instrument or a convertible security issued to a grantee
that is subject to initial recognition and measurement
guidance within this Topic shall continue to be subject to
the recognition and measurement provisions of this Topic
throughout the life of the instrument, unless its terms are
modified after any of the following:
- Subparagraph superseded by Accounting Standards Update No. 2019-08.
- Subparagraph superseded by Accounting Standards Update No. 2019-08.
- A grantee vests in the award and is no longer providing goods or services.
- A grantee vests in the award and is no longer a customer.
- A grantee is no longer an employee.
35-10A Only for
purposes of paragraph 718-10-35-10, a modification does not
include a change to the terms of an award if that change is
made solely to reflect an equity restructuring provided that
both of the following conditions are met:
- There is no increase in fair value of the award (or the ratio of intrinsic value to the exercise price of the award is preserved, that is, the holder is made whole) or the antidilution provision is not added to the terms of the award in contemplation of an equity restructuring.
- All holders of the same class of equity instruments (for example, stock options) are treated in the same manner.
35-11 Other modifications of
that instrument that take place after a grantee vests in the
award and is no longer providing goods or services, is no
longer a customer, or is no longer an employee should be
subject to the modification guidance in paragraph
718-10-35-14. Following modification, recognition and
measurement of the instrument shall be determined through
reference to other applicable GAAP.
35-12 Once the classification of an instrument is determined, the recognition and measurement provisions of this Topic shall be applied until the instrument ceases to be subject to the requirements discussed in paragraph 718-10-35-10. Topic 480 or other applicable GAAP, such as Topic 815, applies to a freestanding financial instrument that was issued under a share-based payment arrangement but that is no longer subject to this Topic. This guidance is not intended to suggest that all freestanding financial instruments shall be accounted for as liabilities pursuant to Topic 480, but rather that freestanding financial instruments issued in share-based payment transactions may become subject to that Topic or other applicable GAAP depending on their substantive characteristics and when certain criteria are met.
35-13 Paragraph superseded by Accounting Standards Update No. 2016-09.
35-14 An entity may modify (including cancel and replace) or settle a fully vested, freestanding financial
instrument after it becomes subject to Topic 480 or other applicable GAAP. Such a modification or settlement
shall be accounted for under the provisions of this Topic unless it applies equally to all financial instruments of
the same class regardless of the holder of the financial instrument. Following the modification, the instrument
continues to be accounted for under that Topic or other applicable GAAP. A modification or settlement of a
class of financial instrument that is designed exclusively for and held only by grantees (or their beneficiaries)
may stem from the employment or vendor relationship depending on the terms of the modification or
settlement. Thus, such a modification or settlement may be subject to the requirements of this Topic. See
paragraph 718-10-35-10 for a discussion of changes to awards made solely to reflect an equity restructuring.
5.8.1 Awards Modified When the Grantee Is No Longer Providing Goods or Services
A share-based payment award that is subject to ASC 718 generally does not become
subject to other applicable GAAP unless the award is modified when (1) the
individual is no longer an employee, (2) the nonemployee has vested in the award
and is no longer providing goods or services, or (3) the grantee is no longer a
customer. Modifications made to an award when the holder is no longer an
employee or the nonemployee has vested in the award and is no longer providing
goods or services should be accounted for under ASC 718-10-35-11 through 35-14.
After the modification, the award will become subject to other applicable GAAP
(e.g., ASC 815 and ASC 480). Note that once the award becomes subject to other
applicable GAAP, it is ineligible for any of ASC 718’s exceptions to liability
classification.
There are two exceptions to this guidance, however, related to (1) certain
equity restructurings (see the next section) and (2) convertible instruments
issued to nonemployees (see Section 9.5).
5.8.2 Equity Restructurings
ASC 718-10-35-10A clarifies the accounting treatment of changes to the terms of
a share-based payment award that are made solely to reflect an equity
restructuring. While an equity restructuring is considered a modification under
ASC 718-20-35-6, an entity does not treat it as a modification when applying ASC
718-10-35-10A (i.e., it is not subject to other applicable GAAP) if both of the
following conditions are met:
-
There is no increase in fair value of the award (or the ratio of intrinsic value to the exercise price of the award is preserved . . .) or the antidilution provision is not added to the terms of the award in contemplation of an equity restructuring.
-
All holders of the same class of equity instruments . . . are treated in the same manner.