8.8 Classification
If the employee is entitled to purchase a variable number of shares
for a fixed monetary amount, the award would be classified as a share-based
liability (in accordance with ASC 718-10-25-7 and ASC 480) and recorded at its
fair-value-based measure in each reporting period until settlement (i.e., the
purchase date). Upon settlement, the award would be reclassified as equity.
By contrast, if an ESPP contains option features such as a look-back
option, the award would not be precluded from equity classification (in accordance
with ASC 718-10-25-7 and ASC 480) because the employee is entitled to purchase a
variable number of shares for a value that is not fixed on the grant date (i.e., the
employee is subject to the risks and rewards of equity ownership).
In addition, the cash withheld from employees’ salaries during the purchase period
would be recorded as a liability on the entity’s books until the cash is either used
to purchase shares or returned to the employee in accordance with the terms of the
ESPP award. Such cash withheld from employees’ salaries is considered an advance
payment of the exercise price of the ESPP award, which is not treated as a
substantive purchase of stock.
Example 8-6
Assume same facts as in Example
8-5. Because the award entitles the employee
to purchase a variable number of the entity’s shares for a
fixed dollar amount, a share-based liability is recorded as
the offsetting entry to compensation cost. In addition, the
$850 withheld over the next six months would be recorded as
a liability on the entity’s books until the cash is used to
purchase shares or returned to the employee (depending on
the terms of the award).