8.4 Requisite Service Period

Entity A offers an ESPP to all eligible employees. To participate in the offering for the following year, A’s employees must enroll by December 15, 20X1. On that date, all the terms of the ESPP (including the purchase price) are determined, and a grant date is established in accordance with ASC 718. The purchase period for all employees enrolled in the ESPP, which is the period in which actual payroll withholdings are made, is January 1, 20X2, through June 30, 20X2. In accordance with ASC 718-50-25-3, the requisite service period, and therefore the period over which compensation cost will be recognized, is January 1, 20X2, through June 30, 20X2, even though a grant date was established as of December 15, 20X1.

Assume the same facts as in the example above, except that Entity A gives its employees a two-year offering period in which to purchase its shares on June 30, 20X2; December 31, 20X2; June 30, 20X3; and December 31, 20X3. The purchase price of A’s shares is based on a look-back feature that is tied to the lesser of A’s share price on January 1, 20X2, or its share price on the purchase date. Because the grant date cannot be established until all terms of the ESPP are determined (i.e., the purchase price is not determined until January 1, 20X2), the grant date is January 1, 20X2.

Because the ESPP has multiple 6-month purchase periods, each with a look-back feature tied to A’s share price at the beginning of the offering period (i.e., January 1, 20X2, or the grant date), the award in effect has a graded vesting schedule. In addition, because each 6-month purchase period has the same grant date (i.e., January 1, 20X2), there are four separate tranches that have, respectively, a 6-month, 12-month, 18-month, and 24-month requisite service period. Accordingly, A would recognize compensation cost on the basis of its established policy for recognizing compensation cost for graded vesting awards with only a service condition. That is, A would recognize compensation cost for this ESPP on either (1) an accelerated basis as though each portion of the award for each separate requisite service period was, in substance, a separate award or (2) a straight-line basis over all purchase periods from January 1, 20X2, through December 31, 20X3.

Assume the same facts as in Example 8-2, except that Entity A establishes a two-year offering period in which its employees can purchase its shares on the following dates: June 30, 20X2; December 31, 20X2; June 30, 20X3; and December 31, 20X3. For each six-month purchase period, the purchase price of A’s shares is based on a look-back feature that is tied to the lesser of A’s share price at the beginning of each purchase period (i.e., January 1, 20X2; July 1, 20X2; January 1, 20X3; and July 1, 20X3) or its share price on each date of purchase.

Because the ESPP has multiple six-month purchase periods that have a look-back feature tied to A’s share price at the beginning of each purchase period, each purchase period is, in effect, a separate award whose grant date is at the beginning of each purchase period. Accordingly, A would measure and recognize compensation cost separately and sequentially for each of the four six-month purchase periods.

On January 1, 20X1, an employee enrolls in an ESPP. Under the plan, the employee elects to have an aggregate amount of $850 withheld from pay over the next six months (i.e., until June 30, 20X1). The $850 will be used to purchase a variable number of shares of the employer’s stock at a 15 percent discount from their market price on June 30, 20X1. In accordance with ASC 718-50-25-3, the service inception date is January 1, 20X1 (the beginning of the purchase period), and the requisite service period is the six-month period from January 1, 20X1 (the service inception date, which is also the grant date), through June 30, 20X1 (the purchase date). Accordingly, compensation cost of $150 — ($850 withheld from the employee’s pay ÷ 85% discounted market price of the employer’s shares) – $850 withheld from the employee’s pay — is recognized over the period from the service inception date (enrollment date of January 1, 20X1) to the purchase date of June 30, 20X1. Because the plan’s terms specify that the employee purchases a variable number of shares worth a fixed monetary amount, the amount of the benefit conveyed to the employee is known on the grant date (i.e., it is based on the discount from the market price of the entity’s shares and the amount of cash the employee elects to withhold to purchase the entity’s shares) and is unaffected by the number of the entity’s shares ultimately purchased.

Further, if on June 30, 20X1 (the purchase date), the entity’s stock is worth $2 per share, the employee would purchase 500 of the entity’s shares — $850 withheld from the employee’s pay ÷ ($2 market price of the entity’s shares × 85% discounted market price of the entity’s shares) — for $850, resulting in a discount of $150 from the market value of the entity’s shares. Alternatively, if on June 30, 20X1, the entity’s shares are worth $4 per share, the employee would purchase 250 of the entity’s shares — $850 withheld from the employee’s pay ÷ ($4 market price of the entity’s shares × 85% discounted market price of the entity’s shares) — for $850, still resulting in a discount of $150 from the market value of the entity’s shares.