9.3 Recognition
ASC 718-10
Recognition Principle
for Share-Based Payment Transactions
25-2 An entity shall recognize the
goods acquired or services received in a share-based payment
transaction when it obtains the goods or as services are
received, as further described in paragraphs 718-10-25-2A
through 25-2B. The entity shall recognize either a
corresponding increase in equity or a liability, depending
on whether the instruments granted satisfy the equity or
liability classification criteria (see paragraphs
718-10-25-6 through 25-19A).
25-2B Transactions with
nonemployees in which share-based payment awards are granted
in exchange for the receipt of goods or services may involve
a contemporaneous exchange of the share-based payment awards
for goods or services or may involve an exchange that spans
several financial reporting periods. Furthermore, by virtue
of the terms of the exchange with the grantee, the quantity
and terms of the share-based payment awards to be granted
may be known or not known when the transaction arrangement
is established because of specific conditions dictated by
the agreement (for example, performance conditions).
Judgment is required in determining the period over which to
recognize cost, otherwise known as the nonemployee’s vesting
period.
25-2C This guidance does not
address the period(s) or the manner (that is, capitalize
versus expense) in which an entity granting the share-based
payment award (the purchaser or grantor) to a nonemployee
shall recognize the cost of the share-based payment award
that will be issued, other than to require that an asset or
expense be recognized (or previous recognition reversed) in
the same period(s) and in the same manner as if the grantor
had paid cash for the goods or services instead of paying
with or using the share-based payment award. A share-based
payment award granted to a customer shall be reflected as a
reduction of the transaction price and, therefore, of
revenue as described in paragraph 606-10-32-25 unless the
payment to the customer is in exchange for a distinct good
or service, in which case the guidance in paragraph
606-10-32-26 shall apply.
25-3 The accounting for all
share-based payment transactions shall reflect the rights
conveyed to the holder of the instruments and the
obligations imposed on the issuer of the instruments,
regardless of how those transactions are structured. For
example, the rights and obligations embodied in a transfer
of equity shares for a note that provides no recourse to
other assets of the grantee (that is, other than the shares)
are substantially the same as those embodied in a grant of
equity share options. Thus, that transaction shall be
accounted for as a substantive grant of equity share
options.
35-1A A grantor shall recognize the
goods acquired or services received in a share-based payment
transaction with nonemployees when it obtains the goods or
as services are received. A grantor may need to recognize an
asset before it actually receives goods or services if it
first exchanges a share-based payment for an enforceable
right to receive those goods or services. Nevertheless, the
goods or services themselves are not recognized before they
are received.
35-1B If fully vested,
nonforfeitable equity instruments are granted at the date
the grantor and nonemployee enter into an agreement for
goods or services (no specific performance is required by
the nonemployee to retain those equity instruments), then,
because of the elimination of any obligation on the part of
the nonemployee to earn the equity instruments, a grantor
shall recognize the equity instruments when they are granted
(in most cases, when the agreement is entered into). Whether
the corresponding cost is an immediate expense or a prepaid
asset (or whether the debit should be characterized as
contra-equity under the requirements of paragraph
718-10-45-3) depends on the specific facts and
circumstances.
35-1C An entity may grant fully
vested, nonforfeitable equity instruments that are
exercisable by the nonemployee only after a specified period
of time if the terms of the agreement provide for earlier
exercisability if the nonemployee achieves specified
performance conditions. Any measured cost of the transaction
shall be recognized in the same period(s) and in the same
manner as if the entity had paid cash for the goods or
services instead of paying with, or using, the share-based
payment awards.
35-1E A recognized asset or expense
shall not be reversed if a stock option that the nonemployee
has the right to exercise expires unexercised.
35-1F A grantor shall recognize
either a corresponding increase in equity or a liability,
depending on whether the instruments granted satisfy the
equity or liability classification criteria established in
paragraphs 718-10-25-6 through 25-19A. As the goods or
services are disposed of or consumed, the grantor shall
recognize the related cost. For example, when inventory is
sold, the cost is recognized in the income statement as cost
of goods sold, and as services are consumed, the cost
usually is recognized in determining net income of that
period, for example, as expenses incurred for services. In
some circumstances, the cost of services (or goods) may be
initially capitalized as part of the cost to acquire or
construct another asset, such as inventory, and later
recognized in the income statement when that asset is
disposed of or consumed.
As in the case of a share-based payment arrangement with an employee, a
share-based payment arrangement with a nonemployee is an exchange between the
issuing entity and the grantee providing the goods or services. An entity typically
recognizes the effect of that exchange in the balance sheet and income statement as
the goods or services are received. The entity may either (1) recognize the cost as
an expense as the goods or services are received or (2) capitalize the cost as part
of an asset and later recognize it as an expense. For example, if the cost
associated with an award is included in the cost of acquiring or producing
inventory, the cost arising from the award is capitalized, and the capitalized cost
is later recognized as cost of goods sold. As discussed in Section 9.1, any cost associated with nonemployee
awards is recognized under other applicable accounting guidance as though the
grantor paid cash. The term “nonemployee’s vesting period” as used throughout ASC
718 and this publication is intended to represent the recognition of compensation
cost for a nonemployee award in the same period(s) and in the same manner as if the
grantor had paid cash for the goods or services instead of paying with the
share-based payment award.
The credit in the balance sheet is based on the award’s classification. If the
award is classified as equity, the corresponding credit is recorded in equity —
typically as paid-in capital. The measurement date for equity-classified awards is
generally the grant date (see Section 3.2 for further discussion of the determination of the grant
date). If an award is classified as a liability, the corresponding credit is
recorded as a share-based liability. Liability-classified awards are remeasured as
of each reporting date until settlement. See Section 9.5 and Chapter 5 for discussions of the
classification of awards and Chapter 7 for a discussion of the accounting for
liability-classified awards.
Example 9-1
On January 1, 20X1, Entity A enters into an
arrangement with an advertising company that provides
marketing services for the next two years in exchange for
1,000 equity-classified warrants. The warrants vest at the
end of two years (i.e., when the marketing services are
complete). Assume that the grant date is January 1, 20X1,
and the marketing services are provided ratably over the
two-year period.
The fair-value-based measure of the warrants
on January 1, 20X1, is $10. The following journal entries
illustrate the recognition under ASC 718:
Journal Entry: December
31, 20X1
Journal Entry: December
31, 20X2
9.3.1 Attribution of Cost
9.3.1.1 Recognition as if Cash Were Paid
For share-based payment arrangements with employees, compensation cost is
generally recognized ratably over the requisite service period (or ratably
over multiple requisite service periods; see Section 3.6). Because of the nature of
nonemployee awards, ratable recognition over a service period may not
necessarily be appropriate. Any cost recognized for nonemployee share-based
payments should be recognized under other applicable accounting guidance as
though the grantor paid cash. That is, ASC 718 does not prescribe the
period(s) or the manner (i.e., capitalize or expense) in which nonemployee
share-based payments will be recognized. Rather, an entity should recognize
an asset or expense (or reverse a previously recognized cost) in the same
period(s) and in the same manner as though the entity had paid cash for the
goods or services. Accordingly, an entity recognizes the cost of nonemployee
awards during the nonemployee’s vesting period “when it obtains the goods or
as services are received.”
An entity must use judgment in determining the attribution of costs since they may not be tied directly to nonemployee vesting conditions. The entity could grant awards to a vendor that provides services ratably but for which vesting is tied solely to the level of performance. For instance, a vendor could provide services associated with a call center ratably over time, but vesting of the awards could be tied to the resolution of issues within a certain period. Similarly, awards could be provided to a nonemployee for goods, but vesting may not be tied to the delivery of goods (e.g., a nonemployee award issued for goods may vest if less than 1 percent of all goods delivered over a specified period are defective).
9.3.1.2 Graded Vesting Awards
As discussed in Section
3.6.5, ASC 718-10-35-8 requires an entity to elect, as its
accounting policy, one of the following ways to recognize compensation cost
for employee awards that have graded vesting schedules and only contain
service conditions (i.e., no performance or market conditions):
-
On a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards
-
On 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).
The policy election is limited to employee awards. Other than as described in
Section 9.3, ASC 718 does not
provide explicit guidance on the period(s) or manner of cost recognition for
nonemployee awards and consequently does not include a similar policy
election for graded vesting nonemployee awards.
9.3.2 Vesting Conditions
ASC 718-10 — Glossary
Vest
To earn the rights to. A share-based
payment award becomes vested at the date that the
grantee’s right to receive or retain shares, other
instruments, or cash under the award is no longer
contingent on satisfaction of either a service condition
or a performance condition. Market conditions are not
vesting conditions.
The stated vesting provisions of an
award often establish the employee’s requisite service
period or the nonemployee’s vesting period, and an award
that has reached the end of the applicable period is
vested. However, as indicated in the definition of
requisite service period and equally applicable to a
nonemployee’s vesting period, the stated vesting period
may differ from those periods in certain circumstances.
Thus, the more precise terms would be options, shares,
or awards for which the requisite good has been
delivered or service has been rendered and the end of
the employee’s requisite service period or the
nonemployee’s vesting period.
While most nonemployee awards are issued in exchange for services, there may be
instances in which such awards are issued for goods. Accordingly, the definition
of “vest” in ASC 718 incorporates vesting conditions tied to the delivery of
goods (in addition to services) and uses the term “nonemployee’s vesting period”
rather than “requisite service period” to describe the period during which the
cost associated with nonemployee awards is recognized (i.e., as the goods or
services are provided).
Under ASC 718, service and performance conditions are vesting conditions, while market conditions are
incorporated into the fair-value-based measurement of share-based payments.
9.3.2.1 Service Condition
ASC 718-10 — Glossary
Service
Condition
A condition affecting the vesting,
exercisability, exercise price, or other pertinent
factors used in determining the fair value of an
award that depends solely on an employee rendering
service to the employer for the requisite service
period or a nonemployee delivering goods or
rendering services to the grantor over a vesting
period. A condition that results in the acceleration
of vesting in the event of a grantee’s death,
disability, or termination without cause is a
service condition.
The definition of service condition incorporates characteristics of nonemployee awards by stating that such a condition can be satisfied if “a nonemployee deliver[s] goods or render[s] services to the grantor over a vesting period.”
ASC 718-10
35-1D The total amount of
compensation cost recognized for share-based payment
awards to nonemployees shall be based on the number
of instruments for which a good has been delivered
or a service has been rendered. To determine the
amount of compensation cost to be recognized in each
period, an entity shall make an entity-wide
accounting policy election for all nonemployee
share-based payment awards, including share-based
payment awards granted to customers, to do either of
the following:
-
Estimate the number of forfeitures expected to occur. The entity shall base initial accruals of compensation cost on the estimated number of nonemployee share-based payment awards for which a good is expected to be delivered or a service is expected to be rendered. The entity shall revise that estimate if subsequent information indicates that the actual number of instruments is likely to differ from previous estimates. The cumulative effect on current and prior periods of a change in the estimates shall be recognized in compensation cost in the period of the change.
-
Recognize the effect of forfeitures in compensation cost when they occur. Previously recognized compensation cost for a nonemployee share-based payment award shall be reversed in the period that the award is forfeited.
In a manner similar to its guidance on employee awards with certain conditions
(see Section
3.4), ASC 718 allows an entity to make an entity-wide policy
election for all nonemployee awards (including share-based payments issued
as sales incentives to customers; see Section
14.4) to either (1) estimate forfeitures or (2) recognize
forfeitures when they occur. The policy election is independent of the
entity’s policy election for employee awards. If the entity elects to
estimate forfeitures, it should recognize the cost of nonemployee awards on
the basis of its estimate of awards for which the goods are expected to be
delivered or the service is expected to be rendered, and the entity should
revise its estimate as appropriate.
An entity’s forfeiture policy is associated solely with service conditions. The
entity must assess the probability of achieving any performance conditions
and may not make a policy election for performance conditions. However, as
noted above, unlike employee service conditions, nonemployee vesting
conditions might not be tied to the provision of service for a specific
period. An entity will need to use judgment to determine whether its
forfeiture policy applies to certain nonemployee vesting conditions, because
it may not be obvious whether such conditions are service or performance
conditions. See Section 9.3.2.2 for a
discussion of determining whether a nonemployee vesting condition is a
service condition or performance condition.
In addition, an entity may consider the nature and volume of awards granted to nonemployees when
assessing which forfeiture accounting policy to elect. The number of nonemployee award grantees may
not be significant relative to that of employee award grantees (which often consist of large employee
pools). Consequently, there may be insufficient historical forfeiture data, which may make it difficult for
an entity to estimate how many nonemployee awards will be forfeited. In such circumstances, an entity
that elects to estimate forfeitures might conclude that each nonemployee will fulfill its contract and that
no awards are estimated to be forfeited. However, an entity may reasonably estimate forfeitures on the
basis of historical forfeiture data if the volume of nonemployee providers is large and the nonemployees
share similar characteristics. For example, an entity may grant awards to employees of a third-party
management advisory company that vest if the grantees provide advisory services for a specified period.
In this situation, the entity may be able to use historical forfeiture data to estimate forfeitures if the
grantees perform a function that is similar to that of the entity’s employees.
9.3.2.2 Performance Condition
ASC 718-10 — Glossary
Performance
Condition
A condition affecting the vesting,
exercisability, exercise price, or other pertinent
factors used in determining the fair value of an
award that relates to both of the following:
-
Rendering service or delivering goods for a specified (either explicitly or implicitly) period of time
-
Achieving a specified performance target that is defined solely by reference to the grantor’s own operations (or activities) or by reference to the grantee’s performance related to the grantor’s own operations (or activities).
Attaining a specified growth rate in
return on assets, obtaining regulatory approval to
market a specified product, selling shares in an
initial public offering or other financing event,
and a change in control are examples of performance
conditions. A performance target also may be defined
by reference to the same performance measure of
another entity or group of entities. For example,
attaining a growth rate in earnings per share (EPS)
that exceeds the average growth rate in EPS of other
entities in the same industry is a performance
condition. A performance target might pertain to the
performance of the entity as a whole or to some part
of the entity, such as a division, or to the
performance of the grantee if such performance is in
accordance with the terms of the award and solely
relates to the grantor’s own operations (or
activities).
The definition of a performance condition incorporates characteristics of
nonemployee awards since it states that the performance target might pertain
to the “performance of the grantee if such performance is in accordance with
the terms of the award and solely relates to the grantor’s own operations
(or activities).” An entity is required to recognize any cost on the basis
of the probable outcome of performance conditions.
Example 9-2
On January 1, 20X1, Entity C enters
into a contract with an advertising company that
provides marketing services in exchange for a cash
fee. The marketing services are completed on
December 31, 20X1. The cost associated with the cash
fee is recognized as the marketing services are
performed. In addition, if C achieves $100 million
in sales over a one-year period after the services
are provided (January 1, 20X2, through December 31,
20X2), the advertising company will receive 100
equity-classified warrants. Entity C concludes that
it is probable that it will achieve $100
million in sales for the one-year period, and it
achieves that sales target on December 31, 20X2.
Under ASC 718, C recognizes the
grant-date fair-value-based measure of the warrants
since achievement of the sales target (performance
condition) is probable. In addition, C would
generally recognize the cost as the marketing
services are performed.
The
fair-value-based measure of the warrants on January
1, 20X1, is $10. The following journal entry
illustrates the recognition under ASC 718:
Journal Entry: December 31, 20X1
Because the vesting conditions of nonemployee awards might not be similar to those of employee
awards (e.g., employment for a specified period), an entity must apply judgment in determining whether
a nonemployee vesting condition is a service condition or performance condition. For example,
vesting conditions for certain nonemployee awards may be tied to specific tasks and activities (e.g.,
promoting the entity’s products at a defined number of events) rather than to the provision of service
for a specified period. In such circumstances, those specific tasks and activities may represent service
conditions instead of performance conditions. To meet the definition of a performance condition,
the vesting requirement must be related to the grantor’s operations or activities, not the grantee’s.
Therefore, certain tasks and activities that a nonemployee must perform (e.g., quality-control services
that include an assessment of a minimum number of locations each year) to vest in awards may be
characterized as service conditions because they are not solely related to the grantor’s own operations
or activities.
Example 9-3
Entity B grants 100 warrants to a distributor that is not a customer (i.e., it is a vendor). The warrants will vest as long as the distributor provides B’s products at 20 of its locations for two years. In addition, if the distributor generates $100 million in sales for B during that two-year period, an additional 100 warrants will vest. While the maintenance of B’s products at 20 of the distributor’s locations and the generation of $100 million in sales for B are both related to the distributor’s performance, B would need to assess whether each vesting condition is a service or performance condition. B may reasonably conclude that maintaining its products at 20 of the distributor’s locations is a service condition and that achieving $100 million in sales to earn additional warrants is a performance condition. While achievement of $100 million in sales for B is associated with the distributor’s service and performance, such performance is related solely to B’s own operations. By contrast, maintaining B’s products at 20 of the distributor’s locations may not be related solely to B’s own operations and may therefore be treated as a service condition.