7.2 Recognition

As indicated in Section 7.1, the fair-value-based measure (or intrinsic value for a nonpublic entity that elects that method for awards issued in exchange for goods or services) of a share-based payment award that is classified as a liability is remeasured at the end of each reporting period until settlement. Therefore, for all liability-classified awards, the settlement amount will ultimately be the total amount of compensation cost recognized. The changes in the fair-value-based measure (or intrinsic value) are recognized as compensation cost (with a corresponding increase or decrease in the share-based liability) either immediately or over the employee’s remaining requisite service period or nonemployee’s vesting period, depending on the vested status of the award. For unvested awards, the percentage of the fair-value-based measure (or intrinsic value) that is recognized as compensation cost at the end of each period is based on (1) the percentage of the requisite service that has been rendered (for employee awards) or (2) the percentage that would have been recognized had the grantor paid cash for the goods or services instead of paying with a share-based payment award as of that date (for nonemployee awards).

7.2.1 Cash-Settled SARs

The example in ASC 718-30 below illustrates the accounting for a cash-settled SAR associated with an award that is recognized on the basis of its fair-value-based measure. The example also illustrates how the classification of a share-based payment award affects the accounting for income taxes.

ASC 718-30

Illustrations

Example 1: Cash-Settled Stock Appreciation Right

55-1 This Example illustrates the guidance in paragraphs 718-30-35-2 through 35-4 and 718-740-25-2 through 25-4.

55-1A This Example (see paragraphs 718-30-55-2 through 55-11) describes employee awards. However, the principles on how to account for the various aspects of employee awards, except for the compensation cost attribution and certain inputs to valuation, are the same for nonemployee awards. Consequently, the concepts about valuation and forfeiture estimation and remeasurement of awards, exercise, and expiration in paragraphs 718-30-55-2 through 55-11 are equally applicable to nonemployee awards with the same features as the awards in this Example (that is, awards with a specified period of time for vesting classified as liabilities). Therefore, the guidance in those paragraphs may serve as implementation guidance for similar nonemployee awards.

55-1B Compensation cost attribution for awards to nonemployees may be the same or different for employee awards. That is because an entity is required to recognize compensation cost for nonemployee awards in the same manner as if the entity had paid cash in accordance with paragraph 718-10-25-2C. Additionally, valuation amounts used in this Example could be different because an entity may elect to use the contractual term as the expected term of share options and similar instruments when valuing nonemployee share-based payment transactions.

55-2 Entity T, a public entity, grants share appreciation rights with the same terms and conditions as those described in Example 1 (see paragraph 718-20-55-4). As in Example 1, Case A, Entity T makes an accounting policy election in accordance with paragraph 718-10-35-3 to estimate the number of forfeitures expected to occur and includes that estimate in its initial accrual of compensation costs. Each stock appreciation right entitles the holder to receive an amount in cash equal to the increase in value of 1 share of Entity T stock over $30. Entity T determines the grant-date fair value of each stock appreciation right in the same manner as a share option and uses the same assumptions and option-pricing model used to estimate the fair value of the share options in that Example; consequently, the grant-date fair value of each stock appreciation right is $14.69 (see paragraphs 718-20-55-7 through 55-9). The awards cliff-vest at the end of three years of service (an explicit and requisite service period of three years). The number of stock appreciation rights for which the requisite service is expected to be rendered is estimated at the grant date to be 821,406 (900,000 × .973). Thus, the fair value of the award as of January 1, 20X5, is $12,066,454 (821,406 × $14.69). For simplicity, this Example assumes that estimated forfeitures equal actual forfeitures.

55-3 Paragraph 718-30-35-4 permits a nonpublic entity to measure share-based payment liabilities at either fair value (or, in some cases, calculated value) or intrinsic value. If a nonpublic entity elects to measure those liabilities at fair value, the accounting demonstrated in this Example would be applicable. Paragraph 718-30-35-3 requires that share-based compensation liabilities be recognized at fair value or a portion thereof (depending on the percentage of requisite service rendered at the reporting date) and be remeasured at each reporting date through the date of settlement; consequently, compensation cost recognized during each year of the three-year vesting period (as well as during each year thereafter through the date of settlement) will vary based on changes in the award’s fair value. As of December 31, 20X5, the assumed fair value is $10 per stock appreciation right; hence, the fair value of the award is $8,214,060 (821,406 × $10). The share-based compensation liability as of December 31, 20X5, is $2,738,020 ($8,214,060 ÷ 3) to account for the portion of the award related to the service rendered in 20X5 (1 year of the 3-year requisite service period). For convenience, this Example assumes that journal entries to account for the award are performed at year-end. The journal entries for 20X5 are as follows.

55-4 As of December 31, 20X6, the fair value is assumed to be $25 per stock appreciation right; hence, the award’s fair value is $20,535,150 (821,406 × $25), and the corresponding liability at that date is $13,690,100 ($20,535,150 × 2/3) because service has been provided for 2 years of the 3-year requisite service period. Compensation cost recognized for the award in 20X6 is $10,952,080 ($13,690,100 – $2,738,020). Entity T recognizes the following journal entries for 20X6.

55-5 As of December 31, 20X7, the fair value is assumed to be $20 per stock appreciation right; hence, the award’s fair value is $16,428,120 (821,406 × $20), and the corresponding liability at that date is $16,428,120 ($16,428,120 × 1) because the award is fully vested. Compensation cost recognized for the liability award in 20X7 is $2,738,020 ($16,428,120 – $13,690,100). Entity T recognizes the following journal entries for 20X7.

55-6 The share-based liability award is as follows.

55-7 For simplicity, this Example assumes that all of the stock appreciation rights are exercised on the same day, that the liability award’s fair value is $20 per stock appreciation right, and that Entity T has already recognized its income tax expense for the year without regard to the effects of the exercise of the employee stock appreciation rights. In other words, current tax expense and current taxes payable were recognized based on taxable income and deductions before consideration of additional deductions from exercise of the stock appreciation rights. The amount credited to cash for the exercise of the stock appreciation rights is equal to the share-based compensation liability of $16,428,120.

55-8 At exercise the journal entry is as follows.

55-9 The cash paid to the employees on the date of exercise is deductible for tax purposes. The tax benefit is $5,749,842 ($16,428,120 × .35).

55-10 At exercise the journal entry is as follows.

55-11 If the stock appreciation rights had expired worthless, the share-based compensation liability account and deferred tax asset account would have been adjusted to zero through the income statement as the award’s fair value decreased.

Since a liability-classified SAR is remeasured at the end of each reporting period until settlement, the settlement amount and ultimate amount of compensation cost recognized will generally be equal to the award’s intrinsic value, even if recognized on the basis of its fair-value-based measure. This is because upon settlement, there is no remaining time value. Therefore, the ultimate amount of compensation cost recognized for a cash-settled SAR will be the same regardless of whether a nonpublic entity elects to measure its liability-classified awards issued in exchange for goods or services on the basis of their fair-value-based measure or intrinsic value. (See Section 7.3 for a discussion of the intrinsic-value practical expedient available for nonpublic entities.) In addition, as noted in ASC 718-30-55-11, if a cash-settled SAR is worthless at expiration, the ultimate amount of compensation cost recognized will be zero. By contrast, an equity-classified stock option or SAR will be recognized at its grant-date fair-value-based measure, and compensation cost cannot be reversed if the award is worthless at expiration as long as the vesting conditions are met (i.e., the good is delivered or the service is rendered).

7.2.2 Changes to the Requisite Service Period

As discussed in ASC 718-30-35-1, liability-classified awards must be remeasured at the end of each reporting period until settlement of the award. When the service period is explicit or implicit, the requisite service period is generally updated in each reporting period conjointly with the award remeasurement. If the requisite service period is based on a market condition’s derived service period, we believe that a company should a establish an accounting policy by using one of the following two acceptable approaches for determining the requisite service period:

Grant-date method — The derived service period is established on the grant date and is not subsequently adjusted when the award is remeasured in each reporting period. Those that adopt this accounting policy believe that ASC 718-10-55-77 establishes an applicable principle even though that guidance is specific to equity-classified awards.
Remeasurement method — Update the derived service period on each reporting date conjointly with the award remeasurement. Those that adopt this approach believe that ASC 718-10-55-77 does not apply to liability-classified awards and that adjusting the derived service period cannot be separated from the remeasurement of the award in each reporting period.

See Section 3.6.3 for a more detailed discussion of the derived service period for employee awards.

7.2.3 Liability-Classified Awards With Market Conditions

As discussed in Section 3.5, the effect of a market condition is reflected in the fair-value-based measure of an award. If an award with a market condition is classified as equity, and the good is delivered or the service is rendered, compensation cost is recognized regardless of whether the market condition is satisfied. However, the same is not true for a liability-classified award that is earned only if a market condition is satisfied. Because liability-classified awards are remeasured at the end of each reporting period until settlement, the final compensation cost will be zero even if the good is delivered or the service is rendered since the market condition has not been satisfied and therefore the award has not been earned.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.