7.3 Intrinsic-Value Practical Expedient for Nonpublic Entities
ASC 718-30
Nonpublic Entity
30-2 A nonpublic entity shall
make a policy decision of whether to measure all of its
liabilities incurred under share-based payment arrangements
(for employee and nonemployee awards) issued in exchange for
distinct goods or services at fair value or at intrinsic
value. However, a nonpublic entity shall initially and
subsequently measure awards determined to be consideration
payable to a customer (as described in paragraph
606-10-32-25) at fair value.
Nonpublic Entity
35-4 Regardless of the
measurement method initially selected under paragraph
718-10-30-20, a nonpublic entity shall remeasure its
liabilities under share-based payment arrangements at each
reporting date until the date of settlement. The
fair-value-based method is preferable for purposes of
justifying a change in accounting principle under Topic 250.
Example 1 (see paragraph 718-30-55-1) provides an
illustration of accounting for an instrument classified as a
liability using the fair-value-based method. Example 2 (see
paragraph 718-30-55-12) provides an illustration of
accounting for an instrument classified as a liability using
the intrinsic value method. A nonpublic entity shall
subsequently measure awards determined to be consideration
payable to a customer (as described in paragraph
606-10-32-25) at fair value.
As noted in Section
7.1, nonpublic entities can elect, as a policy decision, to measure
liability-classified awards issued in exchange for goods or services at intrinsic
value instead of a fair-value-based measure (or at a calculated value if a
fair-value-based measure is not reasonably estimable) as of the end of each
reporting period until the awards are settled. To justify a change in accounting
principle under ASC 250, it is preferable for a nonpublic entity to use the
fair-value-based method (see Section 4.13.4 for a discussion of how to record the effects of an
entity’s change from nonpublic to public entity). Therefore, a nonpublic entity that
has elected to measure its liability-classified awards at a fair-value-based amount
(or calculated value) would not be permitted to subsequently change to the
intrinsic-value method.
The example in ASC 718-30 below illustrates the use of the intrinsic-value method for measuring liability-classified awards, which is available to nonpublic entities.
ASC 718-30
Example 2: Award Granted by a Nonpublic Entity That Elects the Intrinsic Value Method
55-12 This Example illustrates the guidance in paragraphs 718-30-35-4 and 718-740-25-2 through 25-4.
55-12A This Example (see paragraphs 718-30-55-13 through 55-20) 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, a nonpublic entity can make the accounting policy election in paragraph 718-30-30-2 to change its measurement of all liability-classified nonemployee awards from fair value to intrinsic value and remeasure those awards each reporting period as illustrated in this Example. Therefore, the guidance in this Example may serve as implementation guidance for similar liability-classified nonemployee awards.
55-12B Compensation cost attribution for awards to nonemployees may be the same or different for liability-classified 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.
55-13 On January 1, 20X6, Entity W, a nonpublic entity that has chosen the accounting policy of using the intrinsic value method of accounting for share-based payments that are classified as liabilities in accordance with paragraphs 718-30-30-2 and 718-30-35-4, grants 100 cash-settled stock appreciation rights with a 5-year life to each of its 100 employees. Each stock appreciation right entitles the holder to receive an amount in cash equal to the increase in value of 1 share of Entity W’s stock over $7. The awards cliff-vest at the end of three years of service (an explicit and requisite service period of three years). For simplicity, the Example assumes that no forfeitures occur during the vesting period and does not reflect the accounting for income tax consequences of the awards.
55-14 Because of Entity W’s accounting policy decision to use intrinsic value, all of its share-based payments that are classified as liabilities are recognized at intrinsic value (or a portion thereof, depending on the percentage of requisite service that has been rendered) at each reporting date through the date of settlement; consequently, the compensation cost recognized in each year of the three-year requisite service period will vary based on changes in the liability award’s intrinsic value. As of December 31, 20X6, Entity W stock is valued at $10 per share; hence, the intrinsic value is $3 per stock appreciation right ($10 – $7), and the intrinsic value of the award is $30,000 (10,000 × $3). The compensation cost to be recognized for 20X6 is $10,000 ($30,000 ÷ 3), which corresponds to the service provided in 20X6 (1 year of the 3-year service period). For convenience, this Example assumes that journal entries to account for the award are performed at year-end. The journal entry for 20X6 is as follows.
55-15 As of December 31, 20X7, Entity W stock is valued at $8 per share; hence, the intrinsic value is $1 per stock appreciation right ($8 – $7), and the intrinsic value of the award is $10,000 (10,000 × $1). The decrease in the intrinsic value of the award is $20,000 ($10,000 – $30,000). Because services for 2 years of the 3-year service period have been rendered, Entity W must recognize cumulative compensation cost for two-thirds of the intrinsic value of the award, or $6,667 ($10,000 × 2/3); however, Entity W recognized compensation cost of $10,000 in 20X5. Thus, Entity W must recognize an entry in 20X7 to reduce cumulative compensation cost to $6,667.
55-16 As of December 31, 20X8, Entity W stock is valued at $15 per share; hence, the intrinsic value is $8 per stock appreciation right ($15 – $7), and the intrinsic value of the award is $80,000 (10,000 × $8). The cumulative compensation cost recognized as of December 31, 20X8, is $80,000 because the award is fully vested. The journal entry for 20X8 is as follows.
55-17 The share-based liability award at intrinsic value is as follows.
55-18 For simplicity, this Example assumes that all of the stock appreciation rights are settled on the day that they vest, December 31, 20X8, when the share price is $15 and the intrinsic value is $8 per share. The cash paid to settle the stock appreciation rights is equal to the share-based compensation liability of $80,000.
55-19 At exercise the journal entry is as follows.
55-20 If the stock appreciation rights had not been settled, Entity W would continue to remeasure those remaining awards at intrinsic value at each reporting date through the date they are exercised or otherwise settled.