8.5 Forfeitures

To comply with IRC Section 423, ESPPs typically have shorter requisite service periods than other share-based payment awards (i.e., a six- or twelve-month purchase period is common). Nevertheless, an entity must apply its entity-wide forfeiture accounting policy election to ESPPs. If an entity elects to estimate forfeitures, it must do so when it recognizes compensation cost for ESPPs (and must update its estimate if it receives new information indicating that actual forfeitures will differ from previous estimates). When employee turnover is limited, an entity may conclude that it is appropriate to use a minimal forfeiture estimate in determining compensation cost associated with an ESPP. See Section 3.4.1.1 for a discussion of information that an entity may use in estimating forfeitures. See also the examples in Sections 3.4.1.1 and 3.4.1.2 of how to account for forfeitures under either accounting policy election.

Note that when an employee elects to completely withdraw from an ESPP, the withdrawal should be accounted for as a cancellation rather than as a forfeiture. Accordingly, any unrecognized compensation cost should be recognized immediately for the canceled awards. See Section 8.7 for a discussion of the accounting for increases and decreases in an employee’s withholdings (including a complete withdrawal).