2.4 Share-Based Payments

2.4.1 General

ASC 480-10

15-8 The guidance in the Distinguishing Liabilities from Equity Topic does not apply to an obligation under share-based compensation arrangements if that obligation is accounted for under Topic 718. For example, employee stock ownership plan shares or freestanding agreements to repurchase those shares are not within the scope of this Topic because those shares are accounted for under Subtopic 718-40 through the point of redemption. However, this Topic does apply to a freestanding financial instrument that was issued under a share-based compensation arrangement but is no longer subject to Topic 718. For example, this Topic applies to a mandatorily redeemable share issued upon a grantee’s exercise of a share option. (Topic 718 provides accounting guidance for dividends on allocated shares, redemption of shares, recognition of expense, and computing earnings per share [EPS].) However, employee stock ownership plan shares that are mandatorily redeemable or freestanding agreements to repurchase those shares continue to be subject to other applicable guidance related to Subtopic 718-40.

ASC 718-10

25-7 Topic 480 excludes from its scope instruments that are accounted for under this Topic. Nevertheless, unless paragraphs 718-10-25-8 through 25-19A require otherwise, an entity shall apply the classification criteria in Section 480-10-25 and paragraphs 480-10-15-3 through 15-4 in determining whether to classify as a liability a freestanding financial instrument given to a grantee in a share-based payment transaction. Paragraphs 718-10-35-9 through 35-14 provide criteria for determining when instruments subject to this Topic subsequently become subject to Topic 480 or to other applicable GAAP.

25-8 In determining the classification of an instrument, an entity shall take into account the classification requirements as established by Topic 480. In addition, a call option written on an instrument that is not classified as a liability under those classification requirements (for example, a call option on a mandatorily redeemable share for which liability classification is not required for the specific entity under the requirements) also shall be classified as equity so long as those equity classification requirements for the entity continue to be met, unless liability classification is required under the provisions of paragraphs 718-10-25-11 through 25-12.

Awards May Become Subject to Other Guidance

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.

ASC 480 does not apply to instruments issued to a grantee that are subject to ASC 718. This includes share-based payment awards granted to:

Employees as compensation for rendering service.
Nonemployees as compensation for the acquisition of goods or services by the entity.
Customers in conjunction with the entity’s sale of goods or services that are within the scope of ASC 606.

An entity applies ASC 718 to determine (1) whether such instruments should be classified as equity or as liabilities and (2) how to recognize and measure them. Although share-based payment awards subject to ASC 718 are outside the scope of ASC 480, ASC 718-10-25-7 still requires that entities apply the classification guidance in ASC 480-10-25 as well as that in ASC 480-10-15-3 and 15-4 unless ASC 718-10-25 indicates otherwise. For detailed guidance on the application of these requirements, see Chapter 5 of Deloitte’s Roadmap Share-Based Payment Awards.

ASC 480 also does not apply to shares of employee stock ownership plans (ESOPs) or agreements to repurchase ESOP shares. ASC 718-40 addresses the accounting for ESOPs from issuance through the date of settlement.

2.4.2 Considerations Related to Scope

In determining the appropriate classification of an instrument, entities must carefully consider whether the instrument is subject to ASC 480 (and other applicable literature) or ASC 718. An entity’s conclusion is important because the classification requirements in ASC 480 differ from those in ASC 718 and may therefore result in dissimilar classification outcomes (e.g., an option to acquire shares that is classified as equity under ASC 718 may be classified as a liability under ASC 480 or other applicable literature). Also, the guidance on initial and subsequent measurement in ASC 480 differs from that in ASC 718. Furthermore, in some cases, an instrument could be subject to U.S. GAAP other than ASC 480 or ASC 718.

2.4.2.1 Instruments Issued in Conjunction With Financing Activities

ASC 718-10-15-5(b) exempts from the scope of ASC 718 equity instruments and equity-linked instruments granted to a lender or investor that provides financing to the issuer. For example, if an entity obtains a loan in exchange for issuing a contract on its own equity, that contract would not be within the scope of ASC 718; instead, it would be evaluated under ASC 480 along with any other applicable literature (e.g., ASC 815-40).

Entities should consider the reason(s) for issuing equity instruments and equity-linked instruments in financing-related transactions. If an entity issues equity shares or options to acquire equity shares as payment to an underwriter for the services it provided to complete an offering of debt or equity securities, those instruments would be subject to the classification, measurement, and disclosure requirements of ASC 718. However, the instruments issued to third-party investors would be subject to accounting under ASC 480 or other applicable literature (e.g., ASC 815-40). It is possible that the classification of identical instruments (e.g., an option or warrant to acquire equity shares) could differ under the relevant accounting literature. For example, assume that, in conjunction with an issuance of common shares, an entity also issues options to acquire common shares. The options, which have identical terms, are issued to both the third-party investors and to an underwriter as compensation for the services it provided. Depending on the terms, the options issued to third-party investors may be classified as liabilities under ASC 480 or ASC 815-40 and the options issued to the underwriter may be classified as equity instruments under ASC 718.

In some situations, a transaction may involve multiple elements or units of account that are subject to classification and measurement under both ASC 718 and ASC 480 (or other applicable literature). This could be the case even if only one type of instrument was issued. Entities must use judgment and consider the facts and circumstances to determine the appropriate guidance to apply as well as the elements or units of account. For example, an entity might issue 2 million equity shares to another party in return for cash and underwriting services. In this situation, the equity shares issued as compensation for services would be subject to ASC 718 whereas the equity shares issued as part of a financing would be subject to ASC 480 or other applicable literature (e.g., ASC 815-40).

2.4.2.2 Instruments Issued in Conjunction With Asset Acquisitions

An entity may finance the acquisition of a long-lived or intangible asset by transferring its own equity shares or equity-linked instruments rather than paying cash. ASC 805-50-30-2 states, in part, that “if the consideration given is not in the form of cash . . . and no other generally accepted accounting principles (GAAP) apply . . . , measurement is based on either the cost which shall be measured based on the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable.”

In instances in which the form of the consideration given is the acquiring entity’s equity instruments, there are two views in practice regarding the date on which the acquiring entity should measure such equity instruments in an asset acquisition. The first view is that the guidance in ASC 805-50-25-1 requires the acquiring entity’s equity instruments to be measured on the date of the asset acquisition. The second view is that the issuance of shares as consideration in an asset acquisition represents a share-based payment to nonemployees in exchange for goods. Under the second view, the acquiring entity would apply ASC 718 when measuring the equity instruments it issued as consideration in an asset acquisition. Applying ASC 718 may result in a measurement date (i.e., the grant date) that precedes the acquisition date for the shares issued.

If an entity applies the guidance in ASC 805, it should consider ASC 480 and other applicable literature (e.g., ASC 815-40) in determining the classification of the shares or equity-linked instruments issued. However, if an entity applies ASC 718, it should consider the guidance in ASC 718 on classifying share-based payment awards, which may result in a different accounting outcome.

At its March 3, 2021, agenda prioritization meeting, the FASB decided not to add an agenda item related to the clarification of guidance on certain asset acquisition and nonemployee share-based payment transactions. However, on the basis of the discussion at that meeting, either view is acceptable provided that the view is applied consistently as an accounting policy and, if material, disclosed.

2.4.2.3 Modifications of Share-Based Payment Arrangements

An instrument originally issued to a grantee in a share-based payment arrangement that is subject to ASC 718 may become subject to ASC 480 after the contract’s issuance if its terms are modified. ASC 718 ceases to apply if the terms of a share-based payment award originally subject to ASC 718 are modified and the holder is no longer an employee or, for awards granted to nonemployees, a vested award is modified and the grantee is no longer providing goods or services or is no longer a customer. However, ASC 718 continues to apply if the modification is made solely to reflect an equity restructuring and (1) there is no increase in the 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 and (2) all holders of the same class of equity instruments are treated in the same manner. If a contract originally issued to a grantee in a share-based payment arrangement subject to ASC 718 becomes subject to ASC 480, the classification of the contract as equity or as an asset or a liability may change as a result of the application of ASC 480.

Connecting the Dots

Although a contract originally granted in a share-based payment arrangement that is subject to ASC 718 may become subject to other GAAP, including ASC 480, as a result of a modification of its terms, the modification should be accounted for under ASC 718. The classification and subsequent accounting for the instrument under other applicable GAAP are determined after the application of ASC 718’s guidance on accounting for modifications.

2.4.2.4 Settlement of Share-Based Payment Arrangements

ASC 480-10-15-8 indicates that if an employee exercises a stock option within the scope of ASC 718 and receives mandatorily redeemable shares, those shares would not be within the scope of ASC 718 but would need to be evaluated under ASC 480.

Confidential and Proprietary — for Use Solely by Authorized Personnel

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.