Chapter 8 — Employee Stock Purchase Plans
Chapter 8 — Employee Stock Purchase Plans
8.1 Scope
ASC 718-50
General
05-1 This Subtopic provides guidance to entities that use employee share purchase plans. The entity must first determine whether the plan is compensatory or noncompensatory. This is determined by the terms of the plan (see paragraphs 718-50-25-1 through 25-2). A plan with an option feature, for example a look-back feature, is considered compensatory. For a compensatory plan the calculation of the amount of the compensation is important (see Section 718-50-55).
Overall Guidance
15-1 This Subtopic has its own discrete scope, which is separate and distinct from the pervasive scope for this Topic as outlined in Section 718-10-15.
An ESPP is a plan that gives employees the ability to purchase an entity’s shares, typically at a discount. Generally, employees contribute to the ESPP through payroll deductions over a period between the enrollment date and purchase date (referred to as the purchase period). The accumulated payroll withholdings are then used to purchase the entity’s shares on behalf of the participating employees.
The guidance on share-based payment transactions with ESPPs is contained in ASC 718-50 and is separate and distinct from the general requirements in ASC 718, as outlined in ASC 718-10-15.
An ESPP may be considered compensatory or noncompensatory. The distinction is
significant because it affects whether an entity recognizes compensation cost for
the ESPP. To qualify as a noncompensatory plan and, therefore, not give rise to the
recognition of compensation cost, an ESPP must meet certain criteria, which are
discussed in Section
8.2. However, many plans are compensatory because the discount
offered to employees exceeds the limits permissible under ASC 718.
8.2 Noncompensatory Plans
ASC 718-50
General
25-1 An employee share purchase plan that satisfies all of the following criteria does not give rise to recognizable compensation cost (that is, the plan is noncompensatory):
- The plan satisfies either of the following conditions:
- The terms of the plan are no more favorable than those available to all holders of the same class of shares. Note that a transaction subject to an employee share purchase plan that involves a class of equity shares designed exclusively for and held only by current or former employees or their beneficiaries may be compensatory depending on the terms of the arrangement.
- Any purchase discount from the market price does not exceed the per-share amount of share issuance costs that would have been incurred to raise a significant amount of capital by a public offering. A purchase discount of 5 percent or less from the market price shall be considered to comply with this condition without further justification. A purchase discount greater than 5 percent that cannot be justified under this condition results in compensation cost for the entire amount of the discount. Note that an entity that justifies a purchase discount in excess of 5 percent shall reassess at least annually, and no later than the first share purchase offer during the fiscal year, whether it can continue to justify that discount pursuant to this paragraph.
- Substantially all employees that meet limited employment qualifications may participate on an equitable basis.
- The plan incorporates no option features, other than the following:
- Employees are permitted a short period of time — not exceeding 31 days — after the purchase price has been fixed to enroll in the plan.
- The purchase price is based solely on the market price of the shares at the date of purchase, and employees are permitted to cancel participation before the purchase date and obtain a refund of amounts previously paid (such as those paid by payroll withholdings).
25-2 A plan provision that establishes the purchase price as an amount based on the lesser of the equity share’s market price at date of grant or its market price at date of purchase, commonly called a look-back plan, is an example of an option feature that causes the plan to be compensatory. Similarly, a plan in which the purchase price is based on the share’s market price at date of grant and that permits a participating employee to cancel participation before the purchase date and obtain a refund of amounts previously paid contains an option feature that causes the plan to be compensatory. Section 718-50-55 provides guidance on determining whether an employee share purchase plan satisfies the criteria necessary to be considered noncompensatory.
Unless it meets all three conditions in ASC 718-50-25-1, an ESPP is compensatory and therefore gives rise to the recognition of compensation cost.
8.2.1 First Condition in ASC 718-50-25-1
Under ASC 718-50-25-1(a), an ESPP must satisfy either of the following criteria:
- “The terms of the plan are no more favorable than those available to all holders of the same class of shares.”Meeting this criterion is uncommon because ESPPs often offer terms for the purchase of shares that are more favorable than the terms available to all shareholders. To prevent an entity from creating a separate class of shares solely to satisfy this condition, ASC 718-50-25-1(a)(1) contains an anti-abuse provision, which states that “a transaction subject to an employee share purchase plan that involves a class of equity shares designed exclusively for and held only by current or former employees or their beneficiaries may be compensatory depending on the terms of the arrangement.”
- A purchase discount, if it is greater than 5 percent, does not exceed the per-share amount of share issuance costs that would be incurred to raise a significant amount of capital through a public offering.A purchase discount of 5 percent or less from the market price of the entity’s shares is a safe harbor and does not result in a compensatory ESPP. Many IRC Section 423 plans, however, offer a purchase discount of 15 percent from the market price of the entity’s shares. If an entity can justify that the discount (e.g., the 15 percent discount permitted under IRC Section 423) is equivalent to the share issuance costs that the entity would have incurred to raise a significant amount of capital in a public offering, the ESPP may be considered noncompensatory (provided that the plan meets the remaining conditions discussed below). AICPA Technical Q&As Section 4110.01 provides guidance on what amounts should be considered for inclusion in the share issuance cost. It states, in part:Such costs should be limited to the direct cost of issuing the security. Thus, there should be no allocation of officers’ salaries, and care should be taken that legal and accounting fees do not include any fees that would have been incurred in the absence of such issuance.In addition, the entity must continue to justify the appropriateness of the discount percentage (if greater than 5 percent) at least annually and no later than when it makes the first share purchase offer during the fiscal year. If the entity is no longer able to justify a discount in excess of 5 percent, subsequent grants using that discount rate would be considered compensatory (unless the “terms of the plan are no more favorable than those available to all holders of the same class of shares” and the other conditions in ASC 718-50-25-1 are satisfied). The inability to justify a discount on a current offering would not affect the noncompensatory nature of previous offerings. That is, an entity would not record compensation cost for purchase offers made before the entity is unable to justify a discount in excess of 5 percent.
The application of the condition in ASC
718-50-25-1(a) is illustrated in the following implementation guidance:
ASC 718-50
55-35 Another criterion is that the terms are no more favorable than those available to all holders of the same class of shares. For example, Entity A offers all full-time employees and all nonemployee shareholders the right to purchase $10,000 of its common stock at a 5 percent discount from its market price at the date of purchase, which occurs in 1 month. The arrangement is not compensatory because its terms are no more favorable than those available to all holders of the same class of shares. In contrast, assume Entity B has a dividend reinvestment program that permits shareholders of its common stock the ability to reinvest dividends by purchasing shares of its common stock at a 10 percent discount from its market price on the date that dividends are distributed and Entity B offers all full-time employees the right to purchase annually up to $10,000 of its common stock at a 10 percent discount from its market price on the date of purchase. Entity B’s common stock is widely held; hence, many shareholders will not receive dividends totaling at least $10,000 during the annual period. Assuming that the 10 percent discount cannot be justified as the per-share amount of share issuance costs that would have been incurred to raise a significant amount of capital by a public offering, the arrangement is compensatory because the number of shares available to shareholders at a discount is based on the quantity of shares held and the amounts of dividends declared. Whereas, the number of shares available to employees at a discount is not dependent on shares held or declared dividends; therefore, the terms of the employee share purchase plan are more favorable than the terms available to all holders of the same class of shares. Consequently, the entire 10 percent discount to employees is compensatory. If, on the other hand, the 10 percent discount can be justified as the per-share amount of share issuance costs that would have been incurred to raise a significant amount of capital by a public offering, then the entire 10 percent discount to employees is not compensatory. If an entity justifies a purchase discount in excess of 5 percent, it would be required to reassess that discount at least annually and no later than the first share purchase offer during the fiscal year. If upon reassessment that discount is not deemed justifiable, subsequent grants using that discount would be compensatory.
In the example in ASC 718-50-55-35 above, B offers its shareholders the ability to participate in a dividend reinvestment program (DRIP) and offers its employees a 10 percent discount on purchases of its common stock up to $10,000. Because the shareholders are not likely to receive dividends totaling $10,000, their participation in the DRIP will not be the same as that of employees in the ESPP. That is, while the terms of the ESPP (for employees) and the DRIP (for all other shareholders) are similar (i.e., B’s shares may be purchased at a 10 percent discount from the market price), employees can participate in the ESPP by contributing up to $10,000, whereas all other shareholders can participate in the DRIP by contributing only up to the amount of dividends they receive, which may not total $10,000. Accordingly, the terms available to employees under the ESPP may be more favorable.
The ESPP may still be noncompensatory with respect to the discounted shares
offered to employees if B can justify that the
discount does not exceed the share issuance costs
that the entity would have incurred to raise a
significant amount of capital in a public market
(assuming the plan meets the remaining conditions
in ASC 718-50-25-1). However, as discussed above,
the entity must continue to assess the discount
percentage at least annually, and no later than
the first ESPP offer during the fiscal year, to
justify continued use of the discount percentage
on subsequent offerings.
Example 8-1
On January 1, 20X1, Entity A establishes an ESPP that permits employees to purchase A’s shares at a 7 percent discount. Entity A can justify that the 7 percent discount is not greater than the costs A would have incurred in a significant offering of A’s shares in a public market. Therefore, the ESPP is not considered compensatory (provided that all the other criteria in ASC 718-50-25-1 also have been met).
On July 1, 20X1, A makes a second offering under its ESPP, also with a 7 percent discount. Entity A is not required to reassess the 7 percent discount used in the second ESPP offering in 20X1. As long as all the other criteria in ASC 718-50-25-1 continue to be met, the plan is not considered compensatory.
On January 1, 20X2, A makes a third offering under its ESPP and again offers a 7 percent discount. In accordance with ASC 718-50-25-1(a)(2), A would have to justify that the 7 percent discount remains appropriate for this offering. If, for this offering, A can no longer justify the 7 percent discount, the plan is considered compensatory (unless the “terms of the plan are no more favorable than those available to all holders of the same class of shares” and the other conditions in ASC 718-50-25-1 have been met). Entity A’s inability to justify the discount on the current offering would not affect the noncompensatory nature of prior offerings. That is, A would record no compensation cost for purchase offers made before A is unable to justify the discount (i.e., for the January 1, 20X1, and the July 1, 20X1, offerings). Further, for the third offering, A must include the entire amount of the discount (i.e., 7 percent) in determining the amount of compensation cost over the requisite service period, not just the discount in excess of 5 percent.
8.2.2 Second Condition in ASC 718-50-25-1
Under ASC 718-50-25-1(b), the ESPP must allow
substantially all employees that meet limited employment qualifications to
participate on an equitable basis. ASC 718-50-55-34 provides examples of limited
employment qualifications as follows:
ASC 718-50
Example 2: Limitations for Noncompensatory Treatment
55-34 Paragraph 718-50-25-1 stipulates the criteria that an employee share purchase plan must satisfy to be considered noncompensatory. One of those criteria specifies that substantially all employees that meet limited employment qualifications may participate on an equitable basis. Examples of limited employment qualifications might include customary employment of greater than 20 hours per week or completion of at least 6 months of service.
While an entity will assess whether it has satisfied this condition on the basis
of its specific facts and circumstances, the
underlying principle is that the ESPP should be
nondiscriminatory. For example, participation
could be limited to employees in a specific
country and be considered nondiscriminatory.
However, if participation is limited to executives
(i.e., nonexecutives are not eligible to
participate) the ESPP would not meet this
condition.
8.2.3 Third Condition in ASC 718-50-25-1
Under ASC 718-50-25-1(c), an entity assesses whether the ESPP incorporates option features and, if so, whether they cause the plan to become compensatory. Except in the following two circumstances, an option feature renders a plan compensatory:
- The option feature gives an employee “a short period of time — not exceeding 31 days — after the purchase price has been fixed to enroll in the plan.” However, an ESPP with such a feature may have an additional option feature that renders it compensatory. For example, an ESPP would be compensatory if (1) the purchase price is set on the date the employee begins to participate in the plan and is having money withheld to pay for the shares but (2) the plan allows the employee to cancel participation after enrollment and receive a refund of the amount previously withheld from the employee’s pay. This is because the employee begins to benefit from, or be adversely affected by, subsequent changes in the entity’s share price once the purchase price is set. Allowing cancellation of participation after enrollment would give the employee benefits similar to those of a stock option.
- The “purchase price is based solely on the market price of the [entity’s] shares at the date of purchase, and employees are permitted to cancel participation before the purchase date and obtain a refund of amounts previously paid” (emphasis added). Unlike a scenario in which the employee can cancel participation in the plan after the purchase price has been set (and therefore after beginning to benefit from, or be adversely affected by, subsequent changes in the entity’s share price), such an option feature does not give the employee benefits similar to those of a stock option because the employee can only cancel participation before the purchase price is set.
Note that many existing ESPPs include a look-back feature that allows the
purchase price to be set at the lower of (1) the
market price of the entity’s shares on the date
the employee begins participating in the plan and
is having money withheld to pay for the shares or
(2) the market price of the shares on the purchase
date. A look-back feature is considered an option
feature that results in a compensatory plan. See
discussion in Section 8.9.
8.3 Grant Date
Compensation cost for equity-classified ESPP awards is measured on
the grant date. The definition in ASC 718-50 of “grant date” for ESPPs is the same
as that for other forms of share-based payment awards under ASC 718. For a grant
date to be established, all the following conditions must be met:
-
The entity and grantee have reached a mutual understanding of the key terms and conditions of the award.
-
The grantee begins to benefit from, or be adversely affected by, subsequent changes in the price of the entity’s equity shares for equity instruments.
-
All necessary approvals have been obtained.
-
The recipient must meet the definition of an employee.
Generally, the employee’s enrollment and selection of withholdings
(i.e., enrollment period) for ESPPs is completed before the start of the purchase
period. Therefore, the grant date would typically be when the employee has committed
to enrolling in the plan since this is when there would be a mutual understanding of
the arrangement. (See Section
3.2 for more information about determining the grant date.)
For some ESPPs that have a look-back feature (see Section
8.9), the final exercise price may be based on the share price at the
end of the purchase period. However, ASC 718-10-55-83 notes that while the ultimate
exercise price in an award with a look-back feature is not known on the grant date,
such price cannot be greater than the share price at the start of the purchase
period. In this case, the relationship between the exercise price and the current
share price provides a sufficient basis for understanding both the compensatory and
equity relationship established by the award. Provided that all other conditions for
establishing a grant date have been met, the grant date would be established at the
beginning of the purchase period because that is when the employee begins to benefit
from subsequent changes in the price of the shares.
Under the terms of some ESPPs, an employee may be entitled to
purchase a specified dollar amount of an entity’s stock on a future date (e.g., in
one year) at an established discount from the market price of the entity’s stock on
that future date (i.e., a variable number of shares for a fixed monetary amount). In
addition, the ESPP’s terms may not include a look-back feature. That is, the
purchase price would not be the lower of the purchase-date price or the
enrollment-date price of the entity’s stock. Although the liability would be based
on a fixed amount, we do not believe that the ability to benefit from, or be
adversely affected by, subsequent changes in the employer’s stock price would be
necessary to establish a grant date. Thus, the grant date is the beginning of the
purchase period (i.e., the start of the enrollment period through the date on which
the shares are purchased).
8.4 Requisite Service Period
ASC 718-50
25-3 The requisite service period for any compensation cost resulting from an employee share purchase plan is the period over which the employee participates in the plan and pays for the shares.
As with any other share-based payment award, if an ESPP is deemed to be
compensatory, compensation cost is recognized over the requisite service period. The
service inception date is the date on which the requisite service period begins and
is usually the grant date, although there may be circumstances in which the service
inception date precedes the grant date. Given the guidance in ASC 718-50-25-3, the
requisite service period, and therefore the period over which compensation cost is
recognized for an ESPP, will typically be the purchase period, which may begin
before or after the grant date (i.e., the service inception date may not be the
grant date).
If an ESPP contains multiple purchase periods, the award in effect has a graded vesting schedule. Accordingly, an entity would record compensation cost in accordance with its policy on the treatment of awards with only service conditions that have a graded vesting schedule. For such awards, ASC 718-10-35-8 allows entities to elect, as a policy decision, to recognize compensation cost on either (1) an accelerated basis as though each separately vesting portion of the award was, in substance, a separate award or (2) “a straight-line basis over the requisite service period for the entire award (that is, over the requisite service period of the last separately vesting portion of the award).” (See Section 3.6.5 for examples illustrating both methods.) An entity should consistently apply the method it elects for recognizing compensation cost for awards with only a service condition that have a graded vesting schedule.
Note that an entity’s ability to make a policy election regarding how to recognize compensation cost (i.e., on an accelerated or straight-line basis) is not affected by the technique it uses to value an ESPP award or whether the technique may directly or indirectly result in the valuation of each portion of a graded vesting award as an individual award. See Section 4.10 for a discussion of the interaction between valuation techniques and the graded vesting attribution methods.
The examples below illustrate how to determine the requisite service period for different types of ESPPs.
Example 8-2
Recognizing Compensation Cost for an ESPP Over a Single Purchase 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.
Example 8-3
Recognizing Compensation Cost for an ESPP With a Single Look-Back Feature Over Multiple Purchase Periods
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.
Example 8-4
Recognizing Compensation Cost for an ESPP With Multiple Look-Back Features Over Multiple Purchase Periods
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.
Under the terms of some ESPPs, an employee may be entitled to purchase a
specified dollar amount of an entity’s stock on a
future date at an established discount from the
market price of the entity’s stock on that future
date (i.e., a variable number of shares for a
fixed monetary amount). That is, the purchase
price would not be the lower of the purchase-date
price or the enrollment-date price of the entity’s
stock.
Since the terms of the ESPP require the employee to purchase a specific dollar
amount of the employer’s stock on the purchase
date, the amount of compensation cost is fixed and
known on the service inception date (see
Section 8.3
for information about determining the grant date).
That compensation cost is recognized over the
requisite service period, which is the period over
which the employee participates in the plan and
has money withheld to pay for the shares on the
purchase date.
Example 8-5
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.
8.5 Forfeitures
For all employee awards, ASC 718 allows an entity to make an entity-wide
accounting policy election to either (1) estimate forfeitures when share-based
payment awards are granted (and to update its estimate if information becomes
available indicating that actual forfeitures will differ from previous estimates) or
(2) account for forfeitures when they occur.
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).
8.6 Measurement
ASC 718-50
General
30-1 Paragraph 718-10-30-6 states that the objective of the fair value measurement method is to estimate the fair value of the equity instruments, based on the share price and other measurement assumptions at the grant date, that are issued in exchange for providing goods or rendering services. Estimating the fair value of equity instruments at the grant date, which are issued in exchange for employee services, also applies to the fair value measurements associated with grants under a compensatory employee share purchase plan and is the basis for the approach described in Example 1, Case A (see paragraph 718-50-55-10).
Look-Back Plans
30-2 Many employee share purchase plans with a look-back option have features in addition to or different from those of the plan described in Example 1, Case A (see paragraph 718-50-55-10). For example, some plans contain multiple purchase periods, others contain reset mechanisms, and still others allow changes in the withholding amounts or percentages after the grant date (see Example 1, Cases B through E [see paragraphs 718-50-55-22 through 55-33]).
30-3 In some circumstances, applying the measurement approaches described in this Subtopic at the grant date may not be practicable for certain types of employee share purchase plans. Paragraph 718-20-35-1 provides guidance on the measurement requirements if it is not possible to reasonably estimate fair value at the grant date.
Under a compensatory ESPP, the measurement objective is the same as that
described in ASC 718-10, which is to estimate the fair-value-based measure of the
equity instruments on the grant date. Chapter 4 of this Roadmap discusses the
measurement objective outlined in ASC 718-10 in detail. In addition, see Section 8.9 for examples of
the measurement of plans with look-back features.
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).
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).
8.9 Look-Back Plans
The guidance in this section applies to common types of ESPPs that have
look-back features. The examples in the guidance illustrate how entities value ESPPs
with look-back features and separate the award into components to estimate the
fair-value-based measure (see Sections 8.9.1 through 8.9.5). For example, an ESPP that allows
employees to purchase stock at a discount from the lesser of the market price on the
enrollment date or the purchase date would be valued as two components: (1) a
restricted stock award equal in value to the purchase discount and (2) an
at-the-money stock option equal to the discounted purchase price.
ASC 718-50
Variations on Basic Look-Back Plans
55-2 The following are some of the more common types of employee share purchase plans with a look-back option that currently exist and the features that differentiate each type:
- Type A plan — Maximum number of shares. This type of plan permits an employee to have withheld a fixed amount of dollars from the employee’s salary (or a stated percentage of the employee’s salary) over a one-year period to purchase stock. At the end of the one-year period, the employee may purchase stock at 85 percent of the lower of the grant date stock price or the exercise date stock price. If the exercise date stock price is lower than the grant date stock price, the employee may not purchase additional shares (that is, the maximum number of shares that may be purchased by an employee is established at the grant date based on the stock price at that date and the employee’s elected withholdings); any excess cash is refunded to the employee. This is the basic type of employee share purchase plan shown in Example 1, Case A [see paragraph 718-50-55-10]).
- Type B plan — Variable number of shares. This type of plan is the same as the Type A plan except that the employee may purchase as many shares as the full amount of the employee’s withholdings will permit, regardless of whether the exercise date stock price is lower than the grant date stock price (see Example 1, Case B [paragraph 718-50-55-22]).
- Type C plan — Multiple purchase periods. This type of plan permits an employee to have withheld a fixed amount of dollars from the employee’s salary (or a stated percentage of the employee’s salary) over a two-year period to purchase stock. At the end of each six-month period, the employee may purchase stock at 85 percent of the lower of the grant date stock price or the exercise date stock price based on the amount of dollars withheld during that period (see Example 1, Case C [paragraph 718-50-55-26]).
- Type D plan — Multiple purchase periods with a reset mechanism. This type of plan is the same as the Type C plan except that the plan contains a reset feature if the market price of the stock at the end of any six-month purchase period is lower than the stock price at the original grant date. In that case, the plan resets so that during the next purchase period an employee may purchase stock at 85 percent of the lower of the stock price at either the beginning of the purchase period (rather than the original grant date price) or the exercise date (see Example 1, Case D [paragraph 718-50-55-28]).
- Type E plan — Multiple purchase periods with a rollover mechanism. This type of plan is the same as the Type C plan except that the plan contains a rollover feature if the market price of the stock at the end of any six-month purchase period is lower than the stock price at the original grant date. In that case, the plan is immediately cancelled after that purchase date, and a new two-year plan is established using the then-current stock price as the base purchase price (see Example 1, Case D [paragraph 718-50-55-28]).
- Type F plan — Multiple purchase periods with semifixed withholdings. This type of plan is the same as the Type C plan except that the amount (or percentage) that the employee may elect to have withheld is not fixed and may be changed (increased or decreased) at the employee’s election immediately after each six-month purchase date for purposes of all future withholdings under the plan (see Example 1, Case D [paragraph 718-50-55-28]).
- Type G plan — Single purchase period with variable withholdings. This type of plan permits an employee to have withheld an amount of dollars from the employee’s salary (or a stated percentage of the employee’s salary) over a one-year period to purchase stock. That amount (or percentage) is not fixed and may be changed (increased or decreased) at the employee’s election at any time during the term of the plan for purposes of all future withholdings under the plan. At the end of the one-year period, the employee may purchase stock at 85 percent of the lower of the grant date stock price or the exercise date stock price (see Example 1, Case D [paragraph 718-50-55-28]).
- Type H plan — Multiple purchase periods with variable withholdings. This type of plan combines the characteristics of the Type C and Type G plans in that there are multiple purchase periods over the term of the plan and an employee is permitted to change (increase or decrease) withholding amounts (or percentages) at any time during the term of the plan for purposes of all future withholdings under the plan (see Example 1, Case D [paragraph 718-50-55-28]).
- Type I plan — Single purchase period with variable withholdings and cash infusions. This type of plan is the same as the Type G plan except that an employee is permitted to remit catch-up amounts to the entity when (and if) the employee increases withholding amounts (or percentages). The objective of the cash infusion feature is to permit an employee to increase withholding amounts (or percentages) during the term of the plan and remit an amount to the entity such that, on the exercise date, it appears that the employee had participated at the new higher amount (or percentage) during the entire term of the plan (see Example 1, Case E [paragraph 718-50-55-32]).
55-3 The distinguishing characteristic between the Type A plan and the Type B plan is whether the maximum number of shares that an employee is permitted to purchase is fixed at the grant date based on the stock price at that date and the expected withholdings. Each of the remaining plans described above (Type C through Type I plans) incorporates the features of either a Type A plan or a Type B plan. The above descriptions are intended to be representative of the types of features commonly found in many existing plans. The accounting guidance in this Subtopic shall be applied to all plans with characteristics similar to those described above.
55-4 The measurement approach described in Example 1, Case A (see paragraph 718-50-55-10) was developed to illustrate how the fair value of an award under a basic type of employee share purchase plan with a look-back option could be determined at the grant date by focusing on the substance of the arrangement and valuing separately each feature of the award. Although that general technique of valuing an award as the sum of the values of its separate components applies to all types of employee share purchase plans with a look-back option, the fundamental components of an award may differ from plan to plan thus affecting the individual calculations. For example, the measurement approach described in that Case assumes that the maximum number of shares that an employee may purchase is fixed at the grant date based on the grant date stock price and the employee’s elected withholdings (that is, the Type A plan described in paragraph 718-50-55-2). That approach needs to be modified to appropriately determine the fair value of awards under the other types of plans described in that paragraph, including a Type B plan, that do not fix the number of shares that an employee is permitted to purchase.
55-5 Although many employee share purchase plans with a look-back option initially limit the maximum number of shares of stock that the employee is permitted to purchase under the plan (Type A plans), other employee share purchase plans (Type B plans) do not fix the number of shares that the employee is permitted to purchase if the exercise date stock price is lower than the grant date stock price. In effect, an employee share purchase plan that does not fix the number of shares that may be purchased has guaranteed that the employee can always receive the value associated with at least 15 percent of the stock price at the grant date (the employee can receive much more than 15 percent of the grant date value of the stock if the stock appreciates during the look-back period). That provision provides the employee with the equivalent of a put option on 15 percent of the shares with an exercise price equal to the stock price at the grant date. In contrast, an employee who participates in a Type A plan is only guaranteed 15 percent of the lower of the stock price as of the grant date or the exercise date, which is the equivalent of a call option on 85 percent of the shares (as described more fully in paragraph 718-50-55-16). A participant in a Type B plan receives the equivalent of both a put option and a call option.
Illustrations
Example 1: Look-Back Plans
55-6 The following Cases illustrate the guidance in paragraphs 718-50-30-1 through 30-2.
55-7 The following Cases illustrate the fundamental differences between different types of look back plans:
- Basic look-back plans (Case A)
- Look-back plan variable versus maximum number of shares (Case B)
- Look-back plan with multiple purchase periods (Case C)
- Look-back plans with reset or rollover mechanisms (Case D)
- Look-back plans with retroactive cash infusion election (Case E).
55-8 The assumptions used for the numerical calculations in Cases B–E are not intended to be the same as those in Case A. Rather, they are independent and designed to illustrate how the component measurement approach in Case A would be modified to reflect various features of employee stock purchase plans.
55-9 This Example does not take into consideration the effect of interest forgone by the employee on the fair value of an award for which the exercise price is paid over time (for instance, through payroll withholdings). Awards for which part or all of the exercise price is paid before the exercise date are less valuable than awards for which the exercise price is paid at the exercise date, and it is appropriate to recognize that difference in applying the guidance in this Subtopic. However, for simplicity, the effect of forgone interest is not reflected in the fair value calculations in this Example.
8.9.1 Basic Look-Back Plans
ASC 718-50
Case A: Basic Look-Back Plans
55-10 Some entities offer share options to employees under Section 423 of the U.S. Internal Revenue Code, which provides that employees will not be immediately taxed on the difference between the market price of the stock and a discounted purchase price if several requirements are met. One requirement is that the exercise price may not be less than the smaller of either:
- 85 percent of the stock’s market price when the share option is granted
- 85 percent of the price at exercise.
55-11 A share option that provides the employee the choice of either option above may not have a term in excess of 27 months. Share options that provide for the more favorable of two (or more) exercise prices are referred to as look-back share options. A look-back share option with a 15 percent discount from the market price at either grant or exercise is worth more than a fixed share option to purchase stock at 85 percent of the current market price because the holder of the look-back share option is assured a benefit. If the share price rises, the holder benefits to the same extent as if the exercise price was fixed at the grant date. If the share price falls, the holder still receives the benefit of purchasing the stock at a 15 percent discount from its price at the date of exercise. An employee share purchase plan offering share options with a look-back feature would be compensatory because the look-back feature is an option feature (see paragraph 718-50-25-1).
55-12 For example, on January
1, 20X5, when its share price is $30, Entity A offers
its employees the opportunity to sign up for a payroll
deduction to purchase its stock at either 85 percent of
the share’s current price or 85 percent of the price at
the end of the year when the share options expire,
whichever is lower. The exercise price of the share
options is the lesser of $25.50 ($30 × .85) or 85
percent of the share price at the end of the year when
the share options expire.
55-13 The look-back share option can be valued as a combination position. (This Case presents one of several existing valuation techniques for estimating the fair value of a look-back option. In accordance with this Topic, an entity shall use a valuation technique that reflects the substantive characteristics of the instrument being granted in the estimate of fair value.) In this situation, the components are as follows:
- 0.15 of a share of nonvested stock
- 0.85 of a 1-year share option held with an exercise price of $30.
55-14 Supporting analysis for the two components is discussed below.
55-15 Beginning with the
first component, a share option with an exercise price
that equals 85 percent of the value of the stock at the
exercise date will always be worth 15 percent (100% –
85%) of the share price upon exercise. For a stock that
pays no dividends, that share option is the equivalent
of 15 percent of a share of the stock. The holder of the
look-back share option will receive at least the
equivalent of 0.15 of a share of stock upon exercise,
regardless of the share price at that date. For example,
if the share price falls to $20, the exercise price of
the share option will be $17 ($20 × .85), and the holder
will benefit by $3 ($20 – $17), which is the same as
receiving 0.15 of a share of stock for each share
option.
55-16 If the share price upon
exercise is more than $30, the holder of the look-back
share option receives a benefit that is worth more than
15 percent of a share of stock. At prices of $30 or
more, the holder receives a benefit for the difference
between the share price upon exercise and $25.50 — the
exercise price of the share option (.85 × $30). If the
share price is $40, the holder benefits by $14.50 ($40 –
$25.50). However, the holder cannot receive both the
$14.50 value of a share option with an exercise price of
$25.50 and 0.15 of a share of stock. In effect, the
holder gives up 0.15 of a share of stock worth $4.50
($30 × .15) if the share price is above $30 at exercise.
The result is the same as if the exercise price of the
share option was $30 ($25.50 + $4.50) and the holder of
the look-back share option held 85 percent of a 1-year
share option with an exercise price of $30 in addition
to 0.15 of a share of stock that will be received if the
share price is $30 or less upon exercise.
55-17 An option-pricing model can be used to value the 1-year share option on 0.85 of a share of stock represented by the second component. Thus, assuming that the fair value of a share option on one share of Entity A’s stock on the grant date is $4, the compensation cost for the look-back option at the grant date is as follows.
55-18 For a look-back option on a dividend-paying share, both the value of the nonvested stock component and the value of the share option component would be adjusted to reflect the effect of the dividends that the employee does not receive during the life of the share option. The present value of the dividends expected to be paid on the stock during the life of the share option (one year in this Case) would be deducted from the value of a share that receives dividends. One way to accomplish that is to base the value calculation on shares of stock rather than dollars by assuming that the dividends are reinvested in the stock.
55-19 For example, if Entity A pays a quarterly dividend of 0.625 percent (2.5% ÷ 4) of the current share price, 1 share of stock would grow to 1.0252 (the future value of 1 using a return of 0.625 percent for 4 periods) shares at the end of the year if all dividends are reinvested. Therefore, the present value of 1 share of stock to be received in 1 year is only 0.9754 of a share today (again applying conventional compound interest formulas compounded quarterly) if the holder does not receive the dividends paid during the year.
55-20 The value of the share option component is easier to compute; the appropriate dividend assumption is used in an option-pricing model in estimating the value of a share option on a whole share of stock. Thus, assuming the fair value of the share option is $3.60, the compensation cost for the look-back share option if Entity A pays quarterly dividends at the annual rate of 2.5 percent is as follows.
55-21 The first component, which is worth $4.39 at the grant date, is the minimum amount of benefits to the holder regardless of the price of the stock at the exercise date. The second component, worth $3.06 at the grant date, represents the additional benefit to the holder if the share price is above $30 at the exercise date.
8.9.2 Variable Versus Maximum Number of Shares
ASC 718-50
Case B: Look-Back Plan Variable Versus Maximum Number of Shares
55-22 On January 1, 20X0, when its stock price is $50, Entity A offers its employees the opportunity to sign up for a payroll deduction to purchase its stock at the lower of either 85 percent of the stock’s current price or 85 percent of the stock price at the end of the year when the options expire. Thus, the exercise price of the options is the lesser of $42.50 ($50 × 85 percent) or 85 percent of the stock price at the end of the year when the option is exercised. Two employees each agree to have $4,250 withheld from their salaries; however, Employee A is not allowed to purchase any more shares than the $4,250 would buy on the grant date (that is, 100 shares [$4,250/$42.50]) and Employee B is permitted to buy as many shares as the $4,250 will permit under the terms of the plan. In both cases, the 15 percent purchase price discount at the grant date is worth $750 (100 shares × $50 × 15 percent). Depending on the stock price at the end of the year, the value of the 15 percent discount for each employee is as follows.
55-23 As illustrated above, both awards provide the same value to the employee if the stock price at the exercise date has increased (or remained unchanged) from the grant date stock price. However, the award under the Type B plan is more valuable to the employee if the stock price at the exercise date has decreased from the grant date stock price because it guarantees that the employee always will receive at least 15 percent of the stock price at the grant date, whereas the award under the Type A plan only guarantees that the employee will receive 15 percent of the ultimate (lower) stock purchase price.
55-24 Using the component measurement approach described in Case A as the base, the additional feature associated with a Type B plan that shall be included in the fair value calculation is 15 percent of a put option on the employer’s stock (valued by use of a standard option-pricing model, using the same measurement assumptions that were used to value the 85 percent of a call option). If the plan in that Case had the provisions of a Type B plan (that is, a plan that does not fix the number of shares that may be purchased), the fair value of the award would be calculated at the grant date as follows.
With the
same values the fair value of the Type A employee share
purchase plan award described in Case A is determined as
follows:
55-25 In Cases B through E, total compensation cost would be measured at the grant date based on the number of shares that can be purchased using the estimated total withholdings and market price of the stock as of the grant date, and not based on the potentially greater number of shares that may ultimately be purchased if the market price declines. In other words, assume that on January 1, 20X0, Employee A elects to have $850 withheld from his pay for the year to purchase stock. Total compensation cost for the Type B plan award to Employee A would be $291 ($14.57 × 20 grant-date-based shares [$850/$42.50]). For purposes of determining the number of shares on which to measure compensation cost, the stock price as of the grant date less the discount, or $50 × 85 percent in this case, is used.
8.9.3 Multiple Purchase Periods
ASC 718-50
Case C: Look-Back Plan With Multiple Purchase Periods
55-26 In substance, an employee share purchase plan with multiple purchase periods (a Type C plan) is a series of linked awards, similar in nature to how some view a graded vesting stock option plan. Accordingly, the fair value of an award under an employee share purchase plan with multiple purchase periods shall be determined at the grant date in the same manner as an award under a graded vesting stock option plan. Under the graded vesting approach, awards under a two-year plan with purchase periods at the end of each year would be valued as having two separate option tranches both starting on the initial grant date (using the Case A approach if the plan has the characteristics of a Type A plan or using the Case B approach if the plan has the characteristics of a Type B plan) but with different lives of 12 and 24 months, respectively. All other measurement assumptions would need to be consistent with the separate lives of each tranche.
55-27 For example, if the plan in Case A was a two-year Type C plan with purchase periods at the end of each year, the fair value of each tranche of the award would be calculated at the grant date as follows.
8.9.4 Reset or Rollover Mechanisms
ASC 718-50
Case D: Look-Back Plans With Reset or Rollover Mechanisms
55-28 The basic measurement approach described in Case C for a Type C plan also should be used to value awards under employee share purchase plans with multiple purchase periods that incorporate reset or rollover mechanisms (that is, Type D and Type E plans). The fair value of those awards initially can be determined at the grant date using the graded vesting measurement approach. However, at the date that the reset or rollover mechanism becomes effective, the terms of the award have been modified (the exercise price has been decreased and, for a grant under a Type E plan, the term of the award has been extended), which, in substance, is similar to an exchange of the original award for a new award with different terms. Share-based payment modification accounting (see paragraphs 718-20-35-3 through 35-9) shall be applied at the date that the reset or rollover mechanism becomes effective to determine the amount of any incremental fair value associated with the modified grant.
55-29 Likewise, although not a change to the terms of the employee share purchase plan, an election by an employee to increase withholding amounts (or percentages) for future services (Type F through Type H plans) is a modification of the terms of the award to that employee, which, in substance, is similar to an exchange of the original award for a new award with different terms. Accordingly, the fair value of an award under an employee share purchase plan with variable withholdings shall be determined at the grant date (using the Type A, Type B, or Type C measurement approach, as applicable) based on the estimated amounts (or percentages) that a participating employee initially elects to withhold under the terms of the plan. After the grant date (except as noted in paragraph 718-50-35-1), any increases in withholding amounts (or percentages) for future services shall be accounted for as a plan modification in accordance with the guidance in paragraph 718-20-35-3.
55-30 To illustrate, if the plan described in Case C allowed an employee to elect to change withholdings at the end of the first year, modification accounting would be applied at the date the employee elected to increase withholdings to determine the amount, if any, of incremental compensation cost. Assume that on January 1, 20X0, Employee A initially elected to have $850 per year withheld from his pay for each purchase period. However, at the end of Year 1 when the stock price is $60 (and assume that no other factors have changed), Employee A elects to have a total of $1,275 withheld for the second purchase period. At that date, $1,275 is equivalent to 30 shares eligible for purchase at the end of the second year ($1,275/$42.50). At the date Employee A elects to increase withholdings, modification accounting shall be applied to determine the amount of any incremental fair value associated with the modified award as follows.
55-31 The incremental value is determined based on the fair value measurements at the date of the modification using the then-current stock price. To simplify the illustration, the fair value at the modification date is based on the same assumptions about volatility, the risk-free interest rate, and expected dividend yield as at the grant date.
8.9.5 Retroactive Cash Infusion Election
ASC 718-50
Case E: Look-Back Plans With Retroactive Cash Infusion Election
55-32 As with all employee share purchase plans, the objective of the measurement process for employee share purchase plans with a look-back option is to reasonably measure the fair value of the award at the grant date. Unlike Type F through Type H plans, which permit an employee to increase withholding amounts (or percentages) only prospectively, the Type I plan permits an employee to make a retroactive election to increase withholdings. Under a Type I plan, an employee may elect not to participate (or to participate at a minimal level) in the plan until just before the exercise date, thus making it difficult to determine when there truly is a mutual understanding of the terms of the award, and thus the date at which the grant occurs. For example, assume that the Type A employee share purchase plan in Case A permits an employee to remit catch-up amounts (up to a maximum aggregate withholding of 15 percent of annual salary) to Entity A at any time during the term of the plan. On January 1, 20X0, Employee A elects to participate in the plan by having $100 (0.04 percent) of her $250,000 salary withheld monthly from her pay over the year. On December 20, 20X0, when the stock price is $65, Employee A elects to remit a check to Entity A for $36,300, which, together with the $1,200 withheld during the year, represents 15 percent of her salary.
55-33 In that situation, December 20, 20X0 is the date at which Entity A and Employee A have a mutual understanding of the terms of the award in exchange for the services already rendered and Entity A becomes contingently obligated to issue equity instruments to Employee A upon the fulfillment of vesting requirements. The fair value of the entire award to Employee A is therefore measured as of December 20, 20X0.