9.4 Measurement

ASC 718-10

General

10-2 This Topic requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Topic establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions except for equity instruments held by employee stock ownership plans.

Fair-Value-Based

30-2 A share-based payment transaction shall be measured based on the fair value (or in certain situations specified in this Topic, a calculated value or intrinsic value) of the equity instruments issued.

30-3 An entity shall account for the compensation cost from share-based payment transactions in accordance with the fair-value-based method set forth in this Topic. That is, the cost of goods obtained or services received in exchange for awards of share-based compensation generally shall be measured based on the grant-date fair value of the equity instruments issued or on the fair value of the liabilities incurred. The cost of goods obtained or services received by an entity as consideration for equity instruments issued or liabilities incurred in share-based compensation transactions shall be measured based on the fair value of the equity instruments issued or the liabilities settled. The portion of the fair value of an instrument attributed to goods obtained or services received is net of any amount that a grantee pays (or becomes obligated to pay) for that instrument when it is granted. For example, if a grantee pays $5 at the grant date for an option with a grant-date fair value of $50, the amount attributed to goods or services provided by the grantee is $45. An entity shall apply the guidance in paragraph 606-10-32-26 when determining the portion of the fair value of an equity instrument attributed to goods obtained or services received from a customer.

Measurement Objective — Fair Value at Grant Date

30-6 The measurement objective for equity instruments awarded to grantees is to estimate the fair value at the grant date of the equity instruments that the entity is obligated to issue when grantees have delivered the good or rendered the service and satisfied any other conditions necessary to earn the right to benefit from the instruments (for example, to exercise share options). That estimate is based on the share price and other pertinent factors, such as expected volatility, at the grant date.

30-7 The fair value of an equity share option or similar instrument shall be measured based on the observable market price of an option with the same or similar terms and conditions, if one is available (see paragraph 718-10-55-10).

30-8 Such market prices for equity share options and similar instruments granted in share-based payment transactions are frequently not available; however, they may become so in the future.

30-9 As such, the fair value of an equity share option or similar instrument shall be estimated using a valuation technique such as an option-pricing model. For this purpose, a similar instrument is one whose fair value differs from its intrinsic value, that is, an instrument that has time value. For example, a share appreciation right that requires net settlement in equity shares has time value; an equity share does not. Paragraphs 718-10-55-4 through 55-47 provide additional guidance on estimating the fair value of equity instruments, including the factors to be taken into account in estimating the fair value of equity share options or similar instruments as described in paragraphs 718-10-55-21 through 55-22.

In a manner similar to employee awards, nonemployee awards are recognized on the basis of their fair-value-based measure (and in certain circumstances, nonpublic entities are permitted to use calculated value or intrinsic value; see discussions in Sections 9.4.2.2 and 9.4.2.3).

9.4.1 Contractual Term Versus Expected Term

ASC 718-10

Vesting Versus Nontransferability

30-10 To satisfy the measurement objective in paragraph 718-10-30-6, the restrictions and conditions inherent in equity instruments awarded are treated differently depending on whether they continue in effect after the requisite service period or the nonemployee’s vesting period. A restriction that continues in effect after an entity has issued awards, such as the inability to transfer vested equity share options to third parties or the inability to sell vested shares for a period of time, is considered in estimating the fair value of the instruments at the grant date. For equity share options and similar instruments, the effect of nontransferability (and nonhedgeability, which has a similar effect) is taken into account by reflecting the effects of grantees’ expected exercise and postvesting termination behavior in estimating fair value (referred to as an option’s expected term).

30-10A On an award-by-award basis, an entity may elect to use the contractual term as the expected term when estimating the fair value of a nonemployee award to satisfy the measurement objective in paragraph 718-10-30-6. Otherwise, an entity shall apply the guidance in this Topic in estimating the expected term of a nonemployee award, which may result in a term less than the contractual term of the award.

As discussed in Section 4.9.2.2, an entity measures employee stock options under ASC 718 by using an expected term that takes into account the effects of employees’ expected exercise and postvesting employment termination behavior. ASC 718-10-55-29 states that the expected term is used because employee stock options differ from transferable or tradable options “in that employees cannot sell (or hedge) their share options — they can only exercise them; because of this, employees generally exercise their options before the end of the options’ contractual term.” However, determining an expected term for nonemployee awards could be challenging because entities may not have sufficient historical data related to the early exercise behavior of nonemployees, particularly if nonemployee awards are not frequently granted. In addition, nonemployee stock option awards may not be exercised before the end of the contractual term if they do not contain certain features typically found in employee stock option awards (e.g., nontransferability, nonhedgeability, and truncation of the contractual term because of postvesting termination).

Accordingly, ASC 718 allows an entity to elect on an award-by-award basis to use the contractual term as the expected term for nonemployee awards. If an entity elects not to use the contractual term for a particular award, the entity estimates the expected term. However, a nonpublic entity can make an accounting policy election to apply a practical expedient to estimate the expected term for awards that meet the conditions in ASC 718-10-30-20B (see discussion in Section 9.4.2.1).

9.4.2 Practical Expedients for Nonpublic Entities

Under ASC 718, nonpublic entities may apply the same practical expedients to nonemployee awards that they apply to employee awards.

9.4.2.1 Expected Term

ASC 718-10

Vesting Versus Nontransferability

30-10B When a nonpublic entity chooses to measure a nonemployee share-based payment award by estimating its expected term and applies the practical expedient in paragraph 718-10-30-20A, it must apply the practical expedient to all nonemployee awards that meet the conditions in paragraph 718-10-30-20B. However, a nonpublic entity may still elect, on an award-by-award basis, to use the contractual term as the expected term as described in paragraph 718-10-30-10A.

30-20A For an award that meets the conditions in paragraph 718-10-30-20B, a nonpublic entity may make an entity-wide accounting policy election to estimate the expected term using the following practical expedient:

If vesting is only dependent upon a service condition, a nonpublic entity shall estimate the expected term as the midpoint between the employee’s requisite service period or the nonemployee’s vesting period and the contractual term of the award.
If vesting is dependent upon satisfying a performance condition, a nonpublic entity first would determine whether the performance condition is probable of being achieved.
1. If the nonpublic entity concludes that the performance condition is probable of being achieved, the nonpublic entity shall estimate the expected term as the midpoint between the employee’s requisite service period (a nonpublic entity shall consider the guidance in paragraphs 718-10-55-69 through 55-79 when determining the requisite service period of the award) or the nonemployee’s vesting period and the contractual term.
2. If the nonpublic entity concludes that the performance condition is not probable of being achieved, the nonpublic entity shall estimate the expected term as either:
  i. The contractual term if the service period is implied (that is, the requisite service period or the nonemployee’s vesting period is not explicitly stated but inferred based on the achievement of the performance condition at some undetermined point in the future)
  ii. The midpoint between the employee’s requisite service period or the nonemployee’s vesting period and the contractual term if the requisite service period is stated explicitly.

Paragraph 718-10-55-50A provides implementation guidance on the practical expedient.

30-20B A nonpublic entity that elects to apply the practical expedient in paragraph 718-10-30-20A shall apply the practical expedient to a share option or similar award that has all of the following characteristics:

The share option or similar award is granted at the money.
The grantee has only a limited time to exercise the award (typically 30–90 days) if the grantee no longer provides goods, terminates service after vesting, or ceases to be a customer.
The grantee can only exercise the award. The grantee cannot sell or hedge the award.
The award does not include a market condition.

A nonpublic entity that elects to apply the practical expedient in paragraph 718-10-30-20A may always elect to use the contractual term as the expected term when estimating the fair value of a nonemployee award as described in paragraph 718-10-30-10A. However, a nonpublic entity must apply the practical expedient in paragraph 718-10-30-20A for all nonemployee awards that have all the characteristics listed in this paragraph if that nonpublic entity does not elect to use the contractual term as the expected term and that nonpublic entity elects the accounting policy election to apply the practical expedient in paragraph 718-10-30-20A.

Selecting or Estimating the Expected Term

55-29A Paragraph 718-10-30-10A states that, on an award-by-award basis, an entity may elect to use the contractual term as the expected term when estimating the fair value of a nonemployee award to satisfy the measurement objective in paragraph 718-10-30-6. Otherwise, an entity shall apply the guidance in this Topic in estimating the expected term of a nonemployee award, which may result in a term less than the contractual term of the award. If an entity does not elect to use the contractual term as the expected term, similar considerations discussed in paragraph 718-10-55-29, such as the inability to sell or hedge a nonemployee award, apply when estimating its expected term.

As discussed in Section 9.4.1, an entity may make an award-by-award election to use the contractual term as the expected term. If the contractual term is not used and a nonpublic entity instead estimates the expected term, the entity may elect to estimate the expected term by using a practical expedient for nonemployee awards that meet the conditions in ASC 718-10-30-20B. The practical expedient is an entity-wide accounting policy election that must be consistently applied to both employee and nonemployee awards. In addition, if elected, the practical expedient must be applied to all nonemployee awards that meet the conditions in ASC 718-10-30-20B and for which the entity did not first elect to use the contractual term as the expected term. Under the practical expedient, the expected term is generally estimated as the midpoint between the nonemployee’s vesting period and the contractual term of the award. However, the midpoint is not used if an award has an implicit vesting period and a performance condition and it is not probable that the performance condition will be met. In this circumstance, the expected term is the contractual term.

See Section 4.9.2.2.3 for further discussion of the expected-term practical expedient.

Example 9-4

Entity D enters into a contract with an advertising company that provides marketing services in exchange for warrants. In accordance with the terms of the award, the number of warrants earned will depend on the market price of D’s common shares when the marketing services are completed. For this award, D elects not to use the contractual term as the expected term. In addition, D has made an entity-wide accounting policy election to use the practical expedient to estimate the expected term for awards that meet the required conditions. Therefore, D reviews the guidance in ASC 718-10-30-20B to determine whether it should use the practical expedient to estimate the expected term. Because the warrants include a market condition, the practical expedient cannot be applied, and D must estimate the expected term.

9.4.2.2 Calculated Value

ASC 718-10

30-19A Similar to employee equity share options and similar instruments, a nonpublic entity may not be able to reasonably estimate the fair value of nonemployee awards because it is not practicable for the nonpublic entity to estimate the expected volatility of its share price. In that situation, the nonpublic entity shall account for nonemployee equity share options and similar instruments on the basis of a value calculated using the historical volatility of an appropriate industry sector index instead of the expected volatility of the nonpublic entity’s share price (the calculated value) in accordance with paragraph 718-10-30-20. A nonpublic entity’s use of calculated value shall be consistent between employee share-based payment transactions and nonemployee share-based payment transactions.

30-20 A nonpublic entity may not be able to reasonably estimate the fair value of its equity share options and similar instruments because it is not practicable for it to estimate the expected volatility of its share price. In that situation, the entity shall account for its equity share options and similar instruments based on a value calculated using the historical volatility of an appropriate industry sector index instead of the expected volatility of the entity’s share price (the calculated value). Throughout the remainder of this Topic, provisions that apply to accounting for share options and similar instruments at fair value also apply to calculated value. Paragraphs 718-10-55-51 through 55-58 and Example 9 (see paragraph 718-20-55-76) provide additional guidance on applying the calculated value method to equity share options and similar instruments granted by a nonpublic entity.

Under ASC 718, a nonpublic entity is required to use calculated value to measure its stock options and similar instruments granted to employees if it is unable to reasonably estimate the fair value of such awards because it is not practicable for it to estimate the expected volatility of its stock price. This practical expedient also applies to nonemployee awards and needs to be consistently applied to both employee and nonemployee awards. See Section 4.13.2 for further discussion of calculated value.

9.4.2.3 Intrinsic Value

ASC 718-30

30-2 A nonpublic entity shall make a policy decision of whether to measure all of its liabilities incurred under share-based payment arrangements (for employee and nonemployee awards) issued in exchange for distinct goods or services at fair value or at intrinsic value. However, a nonpublic entity shall initially and subsequently measure awards determined to be consideration payable to a customer (as described in paragraph 606-10-32-25) at fair value.

Under ASC 718, the accounting policy election permitting nonpublic entities to measure all liability-classified share-based payment awards at intrinsic value instead of a fair-value-based measure applies to both employee awards and nonemployee awards, with the exception of measuring liability-classified share-based payments issued as sales incentives to customers (see Chapter 14 for additional information about sales incentives to customers). This practical expedient must be consistently applied to both employee and nonemployee awards.

9.4.2.4 Current Price Input for Equity Classified Awards

Nonpublic entities may use, as a practical expedient, “the reasonable application of a reasonable valuation method” to determine the current price input of equity-classified share-based payment awards issued to both employees and nonemployees. See Section 4.13.1.3 for further discussion of the use of this practical expedient.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.