Chapter 9 — Nonemployee Awards
Chapter 9 — Nonemployee Awards
9.1 Overview
ASC 718-10
General
05-1 The Compensation — Stock
Compensation Topic provides guidance on share-based payment
transactions. This Topic includes the following
Subtopics:
-
Overall
-
Awards Classified as Equity
-
Awards Classified as Liabilities
-
Employee Stock Ownership Plans
-
Employee Stock Purchase Plans
-
Income Taxes.
05-2 This Topic provides guidance
for employee and nonemployee share-based payment
transactions.
05-3 This Subtopic provides general
guidance related to share-based payment arrangements. This
Subtopic and Subtopics 718-20 and 718-30 are interrelated
and the required guidance may be located in either this
Subtopic or one of the other Subtopics. In general, material
that relates to both equity and liability instruments is
included in this Subtopic, while material more specifically
related to either equity or liability instruments is
included in their respective Subtopics. Guidance referencing
grantees is intended to be applicable to recipients of both
employee and nonemployee awards, and guidance referencing
employees or nonemployees is only applicable to those
specific types of awards.
General
10-1 The objective of accounting
for transactions under share-based payment arrangements is
to recognize in the financial statements the goods or
services received in exchange for equity instruments granted
or liabilities incurred and the related cost to the entity
as those goods or services are received. This Topic uses the
terms compensation and payment in their
broadest senses to refer to the consideration paid for goods
or services or the consideration paid to a customer.
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.
The objectives of accounting for share-based payment arrangements are the same for nonemployees
as they are for employees, and therefore the guidance on nonemployee and employee awards is largely
aligned. However, there are some significant differences, two of which are as follows:
- Attribution — Any cost associated with nonemployee awards is 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. By contrast, any compensation cost associated with employee awards is generally recognized on a ratable basis over the requisite service period (or over multiple requisite service periods).
- Contractual term — Nonemployee awards of stock options and similar instruments are measured by using the expected term, but the contractual term may be elected as the expected term on an award-by-award basis. By contrast, all employee awards of stock options and similar instruments are measured by using an estimate of the expected term.
9.2 Scope
ASC 718-10
Entities
15-2 The guidance in the
Compensation — Stock Compensation Topic applies to all
entities that enter into share-based payment
transactions.
Transactions
15-3 The guidance in the
Compensation—Stock Compensation Topic applies to all
share-based payment transactions in which a grantor acquires
goods or services to be used or consumed in the grantor’s
own operations or provides consideration payable to a
customer by issuing (or offering to issue) its shares, share
options, or other equity instruments or by incurring
liabilities to an employee or a nonemployee that meet either
of the following conditions:
-
The amounts are based, at least in part, on the price of the entity’s shares or other equity instruments. (The phrase at least in part is used because an award of share-based compensation may be indexed to both the price of an entity’s shares and something else that is neither the price of the entity’s shares nor a market, performance, or service condition.)
-
The awards require or may require settlement by issuing the entity’s equity shares or other equity instruments.
15-3A Paragraphs 323-10-25-3
through 25-5 provide guidance on accounting for share-based
compensation granted by an investor to employees or
nonemployees of an equity method investee that provide goods
or services to the investee that are used or consumed in the
investee’s operations.
15-4 Share-based payments awarded
to a grantee by a related party or other holder of an
economic interest in the entity as compensation for goods or
services provided to the reporting entity are share-based
payment transactions to be accounted for under this Topic
unless the transfer is clearly for a purpose other than
compensation for goods or services to the reporting entity.
The substance of such a transaction is that the economic
interest holder makes a capital contribution to the
reporting entity, and that entity makes a share-based
payment to the grantee in exchange for services rendered or
goods received. An example of a situation in which such a
transfer is not compensation is a transfer to settle an
obligation of the economic interest holder to the grantee
that is unrelated to goods or services to be used or
consumed in a grantor’s own operations.
15-5 The guidance in this Topic
does not apply to transactions involving share-based payment
awards granted to a lender or an investor that provides
financing to the issuer. However, see paragraphs
815-40-35-14 through 35-15, 815-40-35-18, 815-40-55-49, and
815-40-55-52 for guidance on an issuer’s accounting for
modifications or exchanges of written call options to
compensate grantees.
-
Subparagraph superseded by Accounting Standards Update No. 2018-07.
-
Subparagraph superseded by Accounting Standards Update No. 2019-08.
-
Subparagraph superseded by Accounting Standards Update No. 2019-08.
15-5A
Share-based payment awards granted to a customer shall be
measured and classified in accordance with the guidance in
this Topic (see paragraph 606-10-32-25A) and reflected as a
reduction of the transaction price and, therefore, of
revenue in accordance with paragraph 606-10-32-25 unless the
consideration is in exchange for a distinct good or service.
If share-based payment awards are granted to a customer as
payment for a distinct good or service from the customer,
then an entity shall apply the guidance in paragraph
606-10-32-26.
ASC 718 applies to all share-based payment arrangements related to the acquisition of goods and
services from employees and nonemployees. Therefore, most of the guidance in ASC 718 on employee
share-based payments, including most of its requirements related to classification and measurement,
applies to nonemployee share-based payment arrangements. However, it is still important to determine
whether the counterparty (i.e., the grantee) is an employee or a nonemployee since there are certain
differences in the respective guidance (see Section 9.1).
Entities are required to apply ASC 718 to measure and classify
share-based payments issued as consideration payable to a customer under ASC 606.
However, ASC 606 addresses the recognition of share-based sales incentives (e.g., as
a reduction of revenue). For information about accounting for share-based payments
issued as sales incentives, see Section 9.2.1 and Chapter 14.
ASC 718 does not address the accounting for share-based payments received by a
vendor (grantee) from a customer (grantor). Such payments are subject to ASC 606,
which addresses share-based payments received by a vendor in a contract with a
customer. Under ASC 606, share-based payments (i.e., noncash consideration) received
by a vendor (grantee) from a customer (grantor) are measured at their fair value at
contract inception. For more information, see Chapter 6 of Deloitte’s Roadmap Revenue
Recognition.
ASC 718 also does not apply to equity instruments issued to a lender or investor
that provides financing to the issuer. In paragraph BC21 of ASU 2018-07, the FASB clarified that ASC 718
applies to “instruments granted for goods or services used or consumed in a
grantor’s own operations and does not apply to instruments granted essentially to
provide financing to the issuer.” The Board included this anti-abuse measure to
prevent entities from structuring a share-based payment transaction as a means of
raising capital and accounting for it under ASC 718 (particularly its classification
guidance).
9.2.1 Sales Incentives to Customers
ASC 718-10
15-5A Share-based payment
awards granted to a customer shall be measured and
classified in accordance with the guidance in this Topic
(see paragraph 606-10-32-25A) and reflected as a
reduction of the transaction price and, therefore, of
revenue in accordance with paragraph 606-10-32-25 unless
the consideration is in exchange for a distinct good or
service. If share-based payment awards are granted to a
customer as payment for a distinct good or service from
the customer, then an entity shall apply the guidance in
paragraph 606-10-32-26.
ASC 606-10
32-25 Consideration payable to
a customer includes:
- Cash amounts that an entity pays, or expects to pay, to the customer (or to other parties that purchase the entity’s goods or services from the customer)
- Credit or other items (for example, a coupon or voucher) that can be applied against amounts owed to the entity (or to other parties that purchase the entity’s goods or services from the customer)
- Equity instruments (liability or equity classified) granted in conjunction with selling goods or services (for example, shares, share options, or other equity instruments).
An entity shall account for consideration payable to a
customer as a reduction of the transaction price and,
therefore, of revenue unless the payment to the customer
is in exchange for a distinct good or service (as
described in paragraphs 606-10-25-18 through 25-22) that
the customer transfers to the entity. If the
consideration payable to a customer includes a variable
amount, an entity shall estimate the transaction price
(including assessing whether the estimate of variable
consideration is constrained) in accordance with
paragraphs 606-10-32-5 through 32-13.
ASC 718 applies to the measurement and classification of share-based payment
awards issued as consideration payable to a customer. If such consideration is
not in exchange for a distinct good or service, ASC 606 requires that the
consideration be reflected as a reduction of the transaction price. However, ASC
606-10-32-26 states, in part, that “[i]f consideration payable to a customer is
a payment for a distinct good or service from the customer, then an entity shall
account for the purchase of the good or service in the same way that it accounts
for other purchases from suppliers.”
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.
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.
-
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.
- 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.
30-10A 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.
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.
9.5 Classification
ASC 718-10
35-9 Paragraphs 718-10-35-10
through 35-14 are intended to apply to those instruments
issued in share-based payment transactions with employees
and nonemployees accounted for under this Topic, and to
instruments exchanged in a business combination for
share-based payment awards of the acquired business that
were originally granted to grantees of the acquired business
and are outstanding as of the date of the business
combination.
35-9A
Paragraph superseded by Accounting Standards Update No.
2020-06.
35-10 A freestanding financial
instrument or a convertible security issued to a grantee
that is subject to initial recognition and measurement
guidance within this Topic shall continue to be subject to
the recognition and measurement provisions of this Topic
throughout the life of the instrument, unless its terms are
modified after any of the following:
- Subparagraph superseded by Accounting Standards Update No. 2019-08.
- Subparagraph superseded by Accounting Standards Update No. 2019-08.
- A grantee vests in the award and is no longer providing goods or services.
- A grantee vests in the award and is no longer a customer.
- A grantee is no longer an employee.
35-10A Only for
purposes of paragraph 718-10-35-10, a modification does not
include a change to the terms of an award if that change is
made solely to reflect an equity restructuring provided that
both of the following conditions are met:
- There is no increase in fair value of the award (or the ratio of intrinsic value to the exercise price of the award is preserved, that is, the holder is made whole) or the antidilution provision is not added to the terms of the award in contemplation of an equity restructuring.
- All holders of the same class of equity instruments (for example, stock options) are treated in the same manner.
35-11 Other modifications of that
instrument that take place after a grantee vests in the
award and is no longer providing goods or services, is no
longer a customer, or is no longer an employee should be
subject to the modification guidance in paragraph
718-10-35-14. Following modification, recognition and
measurement of the instrument shall be determined through
reference to other applicable GAAP.
35-12 Once the classification of an
instrument is determined, the recognition and measurement
provisions of this Topic shall be applied until the
instrument ceases to be subject to the requirements
discussed in paragraph 718-10-35-10. Topic 480 or other
applicable GAAP, such as Topic 815, applies to a
freestanding financial instrument that was issued under a
share-based payment arrangement but that is no longer
subject to this Topic. This guidance is not intended to
suggest that all freestanding financial instruments shall be
accounted for as liabilities pursuant to Topic 480, but
rather that freestanding financial instruments issued in
share-based payment transactions may become subject to that
Topic or other applicable GAAP depending on their
substantive characteristics and when certain criteria are
met.
35-14 An entity may modify
(including cancel and replace) or settle a fully vested,
freestanding financial instrument after it becomes subject
to Topic 480 or other applicable GAAP. Such a modification
or settlement shall be accounted for under the provisions of
this Topic unless it applies equally to all financial
instruments of the same class regardless of the holder of
the financial instrument. Following the modification, the
instrument continues to be accounted for under that Topic or
other applicable GAAP. A modification or settlement of a
class of financial instrument that is designed exclusively
for and held only by grantees (or their beneficiaries) may
stem from the employment or vendor relationship depending on
the terms of the modification or settlement. Thus, such a
modification or settlement may be subject to the
requirements of this Topic. See paragraph 718-10-35-10 for a
discussion of changes to awards made solely to reflect an
equity restructuring.
The guidance in ASC 718 on the classification of employee share-based payment awards also applies
to nonemployee awards. Therefore, nonemployee awards will generally remain within the scope of ASC
718 unless they are modified after the awards vest and the nonemployee is no longer providing goods
and services (except under an equity restructuring that meets certain criteria). See Chapter 5 for a
discussion of the guidance on the classification of share-based payment awards.
Changing Lanes
In August 2020, the FASB issued ASU 2020-06,
which simplifies the accounting for certain financial instruments with
characteristics of liabilities and equity, including convertible instruments
and contracts on an entity’s own equity. Most of the guidance in that ASU
does not apply to this Roadmap. However, the ASU removes from U.S. GAAP the
guidance on a nonemployee award that is granted in the form of a convertible
instrument described in ASC 718-10-35-9A. Therefore, upon adoption of the
ASU, nonemployee awards in the form of a convertible instrument that are
issued after the date of adoption (or that are outstanding as of (1) the
adoption date under a modified retrospective basis or (2) the beginning of
the earliest period presented under a retrospective basis) will generally
remain within the scope of ASC 718 unless the awards are modified after the
awards vest and the nonemployee is no longer providing goods and services
(except under an equity restructuring that meets certain criteria).
See Deloitte’s August 5, 2020, Heads
Up for additional information about changes required
under the ASU, including its effective dates.
For additional discussion of the issuer’s accounting for
convertible debt after the adoption of ASU 2020-06, see Deloitte’s Roadmap
Issuer’s
Accounting for Debt.
9.6 Nonemployee Awards Exchanged in a Business Combination
ASC 805-30
55-9A The portion of a nonemployee
replacement award attributable to precombination vesting is
based on the fair-value-based measure of the acquiree award
multiplied by the percentage that would have been recognized
had the grantor paid cash for the goods or services instead
of paying with a nonemployee award. For this calculation,
the percentage that would have been recognized is the lower
of:
-
The percentage that would have been recognized calculated on the basis of the original vesting requirements of the nonemployee award
-
The percentage that would have been recognized calculated on the basis of the effective vesting requirements. Effective vesting requirements are equal to the services or goods provided before the acquisition date plus any additional postcombination services or goods required by the replacement award.
55-10 The portion of a nonvested
replacement award (for employee and nonemployee)
attributable to postcombination vesting, and therefore
recognized as compensation cost in the postcombination
financial statements, equals the total fair-value-based
measure of the replacement award less the amount attributed
to precombination vesting. Therefore, the acquirer
attributes any excess of the fair-value-based measure of the
replacement award over the fair value of the acquiree award
to postcombination vesting and recognizes that excess as
compensation cost in the postcombination financial
statements.
55-11 Regardless of the accounting
policy elected in accordance with paragraph 718-10-35-1D or
718-10-35-3, the portion of a nonvested replacement award
included in consideration transferred shall reflect the
acquirer’s estimate of the number of replacement awards for
which the service is expected to be rendered or the goods
are expected to be delivered (that is, an acquirer that has
elected an accounting policy to recognize forfeitures as
they occur in accordance with paragraph 718-10-35-1D or
718-10-35-3 should estimate the number of replacement awards
for which the service is expected to be rendered or the
goods are expected to be delivered when determining the
portion of a nonvested replacement award included in
consideration transferred). For example, if the
fair-value-based measure of the portion of a replacement
award attributed to precombination vesting is $100 and the
acquirer expects that the service will be rendered for only
95 percent of the instruments awarded, the amount included
in consideration transferred in the business combination is
$95. Changes in the number of replacement awards for which
the service is expected to be rendered or the goods are
expected to be delivered are reflected in compensation cost
for the periods in which the changes or forfeitures occur —
not as adjustments to the consideration transferred in the
business combination. If an acquirer’s accounting policy is
to account for forfeitures as they occur, the amount
excluded from consideration transferred (because the service
is not expected to be rendered or the goods are not expected
to be delivered) should be attributed to the postcombination
vesting and recognized in compensation cost over the
employee’s requisite service period or the nonemployee’s
vesting period. Recognition of compensation cost for
nonemployees should consider the recognition guidance
provided in paragraph 718-10-25-2C. That is, recognition of
the fair value of the nonemployee share-based payment award
should be recognized 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 awards.
When nonemployee awards are exchanged in a business combination, it is important for an entity
to determine what portion of the replacement awards is attributed to “precombination vesting” (and
therefore included in the consideration transferred) and what portion is attributed to “postcombination
vesting” (and therefore recognized in the postcombination period). Unlike the computation of ratably
recognized employee awards, the computation of the portion of the replacement awards attributed to
the consideration transferred and the portion attributed to the postcombination period is based on the
percentage of the cost of the awards that would have been recognized in each period if the grantor had
paid cash. Below are examples from ASC 805 illustrating how an acquirer that has provided replacement
awards to nonemployees of an acquiree would attribute such replacement awards to precombination
vesting and postcombination vesting.
ASC 805-30
Example 3: Acquirer
Replacement of Nonemployee Awards
55-25 The following Cases
illustrate the guidance referred to in paragraph 805-30-55-6
for replacement awards that the acquirer was obligated to
issue and the attribution guidance for a nonemployee
replacement award to precombination and postcombination
vesting referenced in paragraph 805-30-55-9A.
55-26 In these Cases, the acquiring
entity is referred to as Acquirer and the acquiree is
referred to as Target:
-
Awards that require no postcombination vesting that are exchanged for acquiree awards for which grantees:
-
Have met the vesting condition as of the acquisition date (Case A)
-
Have not met the vesting condition as of the acquisition date (Case D).
-
-
Awards that require postcombination vesting that are exchanged for acquiree awards for which grantees:
-
Have met the vesting condition as of the acquisition date (Case B)
-
Have not met the vesting condition as of the acquisition date (Case C).
-
55-27 The Cases assume the
following:
-
All awards are classified as equity.
-
The only vesting condition included in the awards, if any, involves the delivery of engines.
-
Target and Acquirer typically pay cash as each engine is delivered to their suppliers.
Case A: No Required Postcombination Vesting
and the Vesting Condition for Acquiree Awards Has Been Met
as of Acquisition Date
55-28 Acquirer issues replacement
awards of $110 (fair-value-based measure) at the acquisition
date for Target awards of $100 (fair-value-based measure) at
the acquisition date. No postcombination vesting is required
for the replacement awards, and Target’s grantee has
delivered all the engines necessary for the acquiree awards
as of the acquisition date.
55-29 The amount attributable to
precombination vesting is the fair-value-based measure of
Target’s awards ($100) at the acquisition date; that amount
is included in the consideration transferred in the business
combination. The amount attributable to postcombination
vesting is $10, which is the difference between the total
value of the replacement awards ($110) and the portion
attributable to precombination vesting ($100). Because no
postcombination vesting is required for the replacement
awards, Acquirer immediately recognizes $10 as compensation
cost in its postcombination financial statements.
Case B: Postcombination Vesting Required and
the Vesting Condition for Acquiree Awards Has Been Met as of
Acquisition Date
55-30 Acquirer exchanges
replacement awards that require the delivery of another 10
engines postcombination for share-based payment awards of
Target for which the grantee had met the necessary vesting
condition to deliver 40 engines before the business
combination. The fair-value-based measure of both awards is
$100 at the acquisition date. Even though the grantee
already had met the vesting condition for the acquiree’s
award, Acquirer attributes a portion of the replacement
award to postcombination compensation cost in accordance
with paragraphs 805-30-30-12 through 30-13 because the
replacement awards require the delivery of an additional 10
engines.
55-31 The portion attributable to
precombination vesting equals the fair-value-based measure
of the acquiree award ($100) multiplied by the percentage
that would have been recognized for the award. The
percentage that would have been recognized is the lower of
the calculation on the basis of the original vesting
requirements and the percentage that would have been
recognized on the basis of the effective vesting
requirements as described in paragraph 805-30-55-9A. The
percentage that would have been recognized on the basis of
the original vesting requirements equals 100 percent, which
is calculated as 40 engines delivered divided by 40 engines
required to be delivered. The percentage that would have
been recognized on the basis of the effective vesting
requirements equals 80 percent, which is calculated as 40
engines delivered divided by 50 engines (the sum of 40
engines delivered plus 10 engines required postcombination).
Thus, $80 ($100 × 80%) is attributed to the precombination
vesting period and therefore is included in the
consideration transferred in the business combination. The
remaining $20 is attributed to the postcombination vesting
period and therefore is recognized as compensation cost in
Acquirer’s postcombination financial statements in
accordance with Topic 718.
Case C: Postcombination Vesting Required and
the Vesting Condition for Acquiree Awards Has Not Been Met
as of Acquisition Date
55-32 Acquirer exchanges
replacement awards that require the delivery of 10 engines
postcombination for share-based payment awards of Target for
which the grantee had not met the necessary vesting
condition to deliver 40 engines before the business
combination. The fair-value-based measure of both awards is
$100 at the acquisition date. As of the acquisition date,
Target grantee has delivered 20 engines, and Target grantee
would have been required to deliver an additional 20 engines
after the acquisition date for its awards to vest.
Accordingly, only a portion of Target’s awards is
attributable to precombination vesting.
55-33 The portion attributable to
precombination vesting equals the fair-value-based measure
of the acquiree award ($100) multiplied by the percentage
that would have been recognized on the award. The percentage
that would have been recognized is the lower of the
percentage that would have been recognized on the basis of
the original vesting requirements and the percentage that
would have been recognized on the basis of the effective
vesting requirements as described in paragraph 805-30-55-9A.
The percentage that would have been recognized on the basis
of the original vesting requirements equals 50 percent,
which is calculated as 20 engines delivered divided by 40
engines required to be delivered. The percentage that would
have been recognized on the basis of the effective vesting
requirements equals 66.67 percent, which is calculated as 20
engines delivered divided by 30 engines (the sum of 20
engines delivered plus 10 engines required postcombination).
Thus, $50 ($100 × 50%) is attributed to precombination
vesting and therefore is included in the consideration
transferred in the business combination. The remaining $50
is attributed to the postcombination vesting and therefore
is recognized as compensation cost in Acquirer’s
postcombination financial statements in accordance with
Topic 718.
Case D: No Postcombination Vesting Required
and the Vesting Condition for Acquiree Awards Has Not Been
Met as of Acquisition Date
55-34 Assume the same facts as in
Case C, except that Acquirer exchanges replacement awards
that require no postcombination vesting for share-based
payment awards of Target for which the grantee had not met
the necessary vesting condition to deliver 40 engines before
the business combination. The terms of the replaced Target
awards did not eliminate the vesting condition upon a change
in control. (If the Target awards had included a provision
that eliminated the vesting condition upon a change in
control, the guidance in Case A [see paragraph 805-30-55-28]
would apply.) The fair-value-based measure of both awards is
$100.
55-35 The portion attributable to
precombination vesting equals the fair-value-based measure
of the acquiree award ($100) multiplied by the percentage
that would have been recognized on the award. The percentage
that would have been recognized is the lower of the
percentage that would have been recognized on the basis of
the original vesting requirements and the percentage that
would have been recognized on the basis of the effective
vesting requirements as described in paragraph 805-30-55-9A.
The percentage that would have been recognized on the basis
of the original vesting requirements equals 50 percent,
which is calculated as 20 engines delivered divided by 40
engines required to be delivered. The percentage that would
have been recognized on the basis of the effective vesting
requirements equals 100 percent, which is calculated as 20
engines delivered divided by 20 engines (the sum of 20
engines delivered plus zero engines required
postcombination). Thus, $50 ($100 × 50%) is attributed to
the precombination vesting and is therefore included in the
consideration transferred in the business combination. The
remaining $50 is attributed to the postcombination vesting.
Because no postcombination vesting is required to vest in
the replacement award, Acquirer recognizes the entire $50
immediately as compensation cost in the postcombination
financial statements.
9.7 Presentation
ASC 718-10
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.
45-3 As discussed in paragraph
718-10-35-1B, a grantor may conclude that an asset (other
than a note or a receivable) has been received in return for
fully vested, nonforfeitable, nonemployee share-based
payment awards that are issued at the date the grantor and
nonemployee enter into an agreement for goods or services
(and no specific performance is required by the nonemployee
to retain those equity instruments). Such an asset shall not
be displayed as contra-equity by the grantor of the award.
The transferability (or lack thereof) of the awards shall
not affect the balance sheet display of the asset. This
guidance is limited to transactions in which awards are
transferred to nonemployees in exchange for goods or
services.
If an entity receives a recourse note for the issuance of a share-based payment
award, that note would generally be presented as contra-equity (see Section 12.1.1). However, if
an entity receives an asset that is not a note or a receivable from a nonemployee
supplier or service provider (e.g., an asset received in return for fully vested,
nonforfeitable equity instruments), that asset should not be presented as
contra-equity.
In addition, in an SEC staff announcement regarding ASC 505-50, the
staff indicated that unvested, forfeitable instruments should be treated as unissued
for accounting purposes until the future services are received. Although the SEC
staff rescinded that announcement at the March 24, 2022, EITF meeting as a result of
the FASB’s issuance of ASU 2018-07, we believe that the underlying principle remains
applicable for unvested, forfeitable instruments issued for goods and services.
9.8 Disclosures
There are no specific or incremental disclosure requirements for nonemployee share-based payment arrangements because the disclosures in ASC 718 apply equally to employee and nonemployee awards. Under ASC 718-10-50-2(g), separate disclosures for nonemployee awards would be required “to the extent that the differences in the characteristics of the awards make separate disclosure important to an understanding of the entity’s use of share-based compensation.” See Chapter 13 for additional guidance on disclosures about share-based payment awards.
9.9 Nonemployees of an Equity Method Investee
ASC 323-10
Stock-Based Compensation
Granted to Employees and Nonemployees of an Equity
Method Investee
25-3 Paragraphs 323-10-25-4 through
25-6 provide guidance on accounting for share-based payment
awards granted by an investor to employees or nonemployees
of an equity method investee that provide goods or services
to the investee that are used or consumed in the investee’s
operations when no proportionate funding by the other
investors occurs and the investor does not receive any
increase in the investor’s relative ownership percentage of
the investee. That guidance assumes that the investor’s
grant of share-based payment awards to employees or
nonemployees of the equity method investee was not agreed to
in connection with the investor’s acquisition of an interest
in the investee. That guidance applies to share-based
payment awards granted to employees or nonemployees of an
investee by an investor based on that investor’s stock (that
is, stock of the investor or other equity instruments
indexed to, and potentially settled in, stock of the
investor).
25-4 In the circumstances described
in paragraph 323-10-25-3, a contributing investor shall
expense the cost of share-based payment awards granted to
employees and nonemployees of an equity method investee as
incurred (that is, in the same period the costs are
recognized by the investee) to the extent that the
investor’s claim on the investee’s book value has not been
increased.
25-5 In the circumstances described
in paragraph 323-10-25-3, other equity method investors in
an investee (that is, noncontributing investors) shall
recognize income equal to the amount that their interest in
the investee’s net book value has increased (that is, their
percentage share of the contributed capital recognized by
the investee) as a result of the disproportionate funding of
the compensation costs. Further, those other equity method
investors shall recognize their percentage share of earnings
or losses in the investee (inclusive of any expense
recognized by the investee for the share-based compensation
funded on its behalf).
25-6 Example 2 (see paragraph
323-10-55-19) illustrates the application of this guidance
for share-based compensation granted to employees of an
equity method investee.
Share-Based Compensation
Granted to Employees and Nonemployees of an Equity
Method Investee
30-3 Share-based compensation cost
recognized in accordance with paragraph 323-10-25-4 shall be
measured initially at fair value in accordance with Topic
718. Example 2 (see paragraph 323-10-55-19) illustrates the
application of this guidance.
Example 2:
Share-Based Compensation Granted to Employees of an
Equity Method Investee
55-19 This Example illustrates the
guidance in paragraphs 323-10-25-3 and 323-10-30-3 for
share-based compensation by an investor granted to employees
of an equity method investee. This Example is equally
applicable to share-based awards granted by an investor to
nonemployees that provide goods or services to an equity
method investee that are used or consumed in the investee’s
operations.
55-20 Entity A owns a 40 percent
interest in Entity B and accounts for its investment under
the equity method. On January 1, 20X1, Entity A grants
10,000 stock options (in the stock of Entity A) to employees
of Entity B. The stock options cliff-vest in three years. If
an employee of Entity B fails to vest in a stock option, the
option is returned to Entity A (that is, Entity B does not
retain the underlying stock). The owners of the remaining 60
percent interest in Entity B have not shared in the funding
of the stock options granted to employees of Entity B on any
basis and Entity A was not obligated to grant the stock
options under any preexisting agreement with Entity B or the
other investors. Entity B will capitalize the share-based
compensation costs recognized over the first year of the
three-year vesting period as part of the cost of an
internally constructed fixed asset (the internally
constructed fixed asset will be completed on December 31,
20X1).
55-21 Before granting the stock
options, Entity A’s investment balance is $800,000, and the
book value of Entity B’s net assets equals $2,000,000.
Entity B will not begin depreciating the internally
constructed fixed asset until it is complete and ready for
its intended use and, therefore, no related depreciation
expense (or compensation expense relating to the stock
options) will be recognized between January 1, 20X1, and
December 31, 20X1. For the years ending December 31, 20X2,
and December 31, 20X3, Entity B will recognize depreciation
expense (on the internally constructed fixed asset) and
compensation expense (for the cost of the stock options
relating to Years 2 and 3 of the vesting period). After
recognizing those expenses, Entity B has net income of
$200,000 for the fiscal years ending December 31, 20X1,
December 31, 20X2, and December 31, 20X3.
55-22 Entity C also owns a 40
percent interest in Entity B. On January 1, 20X1, before
granting the stock options, Entity C’s investment balance is
$800,000.
55-23 Assume that the fair value of
the stock options granted by Entity A to employees of Entity
B is $120,000 on January 1, 20X1. Under Topic 718, the fair
value of share-based compensation should be measured at the
grant date. This Example assumes that the stock options
issued are classified as equity and ignores the effect of
forfeitures.
55-24 Entity A would make the
following journal entries.
55-25 A rollforward of Entity B’s
net assets and a reconciliation to Entity A’s and Entity C’s
ending investment accounts follows.
55-26 A summary of the calculation
of share-based compensation cost by year follows.
ASC 323 provides guidance on share-based payment awards that are issued by an equity method investor to employees and nonemployee goods or service providers of an equity method investee and are indexed to, or settled in, the equity of the investor.