5.9 Change in Classification Due to Change in Probable Settlement Outcome
ASC 718-10
Change in Classification Due to Change in Probable Settlement Outcome
35-15 An option or similar instrument that is classified as equity, but subsequently becomes a liability because the contingent cash settlement event is probable of occurring, shall be accounted for similar to a modification from an equity to liability award. That is, on the date the contingent event becomes probable of occurring (and therefore the award must be recognized as a liability), the entity recognizes a share-based liability equal to the portion of the award attributed to past performance (which reflects any provision for acceleration of vesting) multiplied by the award’s fair value on that date. To the extent the liability equals or is less than the amount previously recognized in equity, the offsetting debit is a charge to equity. To the extent that the liability exceeds the amount previously recognized in equity, the excess is recognized as compensation cost. The total recognized compensation cost for an award with a contingent cash settlement feature shall at least equal the fair value of the award at the grant date. The guidance in this paragraph is applicable only for options or similar instruments issued as part of compensation arrangements. That is, the guidance included in this paragraph is not applicable, by analogy or otherwise, to instruments outside share-based payment arrangements.
An award’s classification can change even if the terms and conditions are not modified. For example, an entity that can choose the settlement method of a stock option award could classify the award as equity upon initially concluding that it has the intent and ability to settle the award with shares. However, the entity could subsequently reclassify the award as a liability if it concludes that it no longer has the intent or ability to settle the award with shares (i.e., it will cash settle the option award). In addition, an entity that initially classifies a stock award as a liability (because a grantee has a noncontingent fair value put option on the shares) could reclassify the award as equity once the grantee has borne the risks and rewards of equity share ownership for six months after the stock award has vested, or for awards of stock options, six months after the option has been exercised.
If an award’s classification changes as a result of changes in an entity’s facts and circumstances (e.g., from equity-classified to liability-classified or vice versa), the entity should account for the change in a manner similar to a modification that changes classification, even if the award has not been modified. The accounting will depend on the classification of the award before and after the change in facts and circumstances. See Section 6.8 for further discussion of changes to the classification of an award as a result of its modification.