8.7 Changes in Employee Withholdings
ASC 718-50
General
35-1 Changes in total employee withholdings during a purchase period that occur solely as a result of salary increases, commissions, or bonus payments are not plan modifications if they do not represent changes to the terms of the award that was offered by the employer and initially agreed to by the employee at the grant (or measurement) date. Under those circumstances, the only incremental compensation cost is that which results from the additional shares that may be purchased with the additional amounts withheld (using the fair value calculated at the grant date). For example, an employee may elect to participate in the plan on the grant date by requesting that 5 percent of the employee’s annual salary be withheld for future purchases of stock. If the employee receives an increase in salary during the term of the award, the base salary on which the 5 percent withholding amount is applied will increase, thus increasing the total amount withheld for future share purchases. That increase in withholdings as a result of the salary increase is not considered a plan modification and thus only increases the total compensation cost associated with the award by the grant date fair value associated with the incremental number of shares that may be purchased with the additional withholdings during the period. The incremental number of shares that may be purchased is calculated by dividing the incremental amount withheld by the exercise price as of the grant date (for example, 85 percent of the grant date stock price).
35-2 Any decreases in the withholding amounts (or percentages) shall be disregarded for purposes of recognizing compensation cost unless the employee services that were valued at the grant date will no longer be provided to the employer due to a termination. However, no compensation cost shall be recognized for awards that an employee forfeits because of failure to satisfy a service requirement for vesting. The accounting for decreases in withholdings is consistent with the requirement in paragraph 718-10-35-3 that the total amount of compensation cost that must be recognized for an award be based on the number of instruments for which the requisite service has been rendered (that is, for which the requisite service period has been completed).
8.7.1 Increase in Withholdings
The accounting for an increase in an employee’s withholding in connection with an ESPP depends on whether the increase results from a rise in (1) the employee’s compensation (i.e., an increase in the total dollar amount of the withholdings, but not the percentage) or (2) the percentage of the employee’s compensation to be withheld.
In accordance with ASC 718-50-35-1, an increase in an employee’s withholding solely as a result of an increase in an employee’s compensation (i.e., salary, commission, or bonus) is not accounted for as a modification of the award (provided that no other changes to the terms of the ESPP have been made). Incremental compensation cost results only from the additional shares that will be purchased with the additional amounts withheld (under the fair-value-based measure calculated as of the grant date). In other words, the increase in the withholding amount does not change the grant-date fair-value-based measure per share of the award. Rather, it changes the quantity of shares that will be purchased in connection with the total award.
By contrast, as indicated in ASC 718-50-55-29, an increase in the percentage of
the employee’s compensation to be withheld is accounted for
as a modification of the award even though it is not a change to the
ESPP’s terms. Therefore, total recognized compensation cost attributable to the
award is (1) the grant-date fair-value-based measure of the original award for
which the required service has been provided (i.e., the number of awards that
have been earned) or is expected to be provided and (2) the incremental
compensation cost conveyed to the holder of the award as a result of the
modification. The incremental compensation cost is the excess of the
fair-value-based measure of the modified award on the date of modification over
the fair-value-based measure of the original award immediately before the
modification. See Section
8.9.4 for an example of how modification accounting is applied in
the determination of incremental compensation cost resulting from an increase in
the percentage of an employee’s withheld compensation.
8.7.2 Decrease in Withholdings
If, before the purchase date, an employee elects to irrevocably withdraw from an ESPP and receive a complete refund of all amounts withheld from his or her pay, the withdrawal should be accounted for as a cancellation if the employee continues employment with the entity. The employee has, in essence, canceled the award associated with that offering. That is, the employee does not have the ability to purchase the entity’s shares under the ESPP since the withdrawal is irrevocable. In accordance with ASC 718-20-35-9, a cancellation of an award that is not accompanied by the concurrent grant of (or offer to grant) a replacement award or other valuable consideration is accounted for as a repurchase for no consideration. Accordingly, any unrecognized compensation cost should be recognized immediately for the canceled awards.
The period over which compensation cost is recognized is different for complete withdrawals than it is for partial withdrawals. Under a partial withdrawal, employees decrease the amount of future payroll withholdings during a purchase period. A decrease in the amount of future payroll withholdings will result in the employee’s purchase of fewer of the entity’s shares on the purchase date. Since such decreases are disregarded under ASC 718-50-35-2, compensation cost continues to be recognized over the requisite service period on the basis of the entire grant-date fair-value-based measure of the award unless the award is forfeited. Decreases in the amount of future payroll withholdings are the equivalent of a failure of the employee to exercise a stock option that has been earned (i.e., vested). Compensation cost can be reversed only when the employee forfeits the award (i.e., the employee fails to provide the requisite service).