7.3 Other Compensation Arrangements
7.3.1 Profits Interests
Under ASC 718, awards granted as profits interests must be analyzed to determine
whether they represent a substantive class of
equity or whether they are more appropriately
classified as a performance bonus or
profit-sharing award. If a profits interest award
is determined not to represent a substantive class
of equity, it would not affect the calculation of
EPS (other than with respect to the impact of any
compensation expense on the numerator). If such an
award does represent a substantive class of
equity, in addition to the EPS considerations for
share-based payment awards discussed in Section
7.1, entities must consider how the
interest shares in the profits and losses of the
issuer because a profits interest may meet the
definition of a participating security to which
the two-class method of EPS must be applied. See
Section 5.3 for further discussion of
the definition of a participating security.
7.3.2 Common Stock Issued to Fund Certain Retirement Benefit Payments
ASC 710-10
Deferred Compensation — Rabbi Trusts
05-8 The Deferred
Compensation — Rabbi Trusts Subsections of this Subtopic
address the accounting for deferred compensation
arrangements where amounts earned by an employee are
invested in the stock of the employer and placed in a
rabbi trust. Certain of those plans allow the employee
to immediately diversify into nonemployer securities or
to diversify after a holding period (for example, six
months); other plans do not allow for diversification.
05-9 The deferred compensation obligation of some plans may be settled in any of the following:
- Cash, by having the trust sell the employer stock (or the diversified assets) in the open market
- Shares of the employer’s stock
- Diversified assets.
In other plans, the deferred compensation obligation may be settled only by delivery of the shares of the employer stock.
Deferred Compensation — Rabbi Trusts
45-3 For all of these types of plans, employer shares held by the rabbi trust shall be treated as treasury stock for earnings per share (EPS) purposes and excluded from the denominator in the basic and diluted EPS calculations. However, the obligation under the deferred compensation arrangement shall be reflected in the denominator of the EPS computation in accordance with the provisions of Section 260-10-45.
45-4 In accordance with paragraph 260-10-45-13, if an obligation is required to be settled by delivery of shares of employer stock (Plan A), those shares shall be included in the calculation of basic and diluted EPS. If the obligation may be settled by delivery of cash, shares of employer stock, or diversified assets (other than Plan A), those shares shall not be reflected in basic EPS but shall be included in the calculation of diluted EPS in accordance with paragraph 260-10-45-30 and paragraphs 260-10-45-45 through 45-46.
Some sponsors of defined benefit pension plans have issued common stock to
trusts established to fund future retirement payments. The common stock of the
sponsor is held until the rabbi trust is required to meet its retirement
obligations, at which time the shares are sold to the public. Because the
sponsor must consolidate the trust, the shares of common stock held by the trust
should not be considered outstanding in the calculation of EPS. Although those
transactions are not within the scope of ASC 718-40, the accounting is similar
to the accounting for shares of a leveraged ESOP that have not been committed to
be released, which are not considered outstanding shares. However, as discussed
in ASC 710-10-45-3 and 45-4, the sponsor’s obligation under the deferred
compensation arrangement should be reflected in the denominator in the EPS
calculation in accordance with ASC 260-10. If an obligation must be settled by
delivery of shares of employer stock (Plan A), those shares should be included
in the calculations of both basic and diluted EPS. If the obligation may be
settled by delivery of cash, shares of employer stock, or diversified assets
(other than Plan A), those shares would not be reflected in basic EPS but would
be included in the calculation of diluted EPS in accordance with the guidance in
ASC 260 on contracts that may be settled in cash or stock. See further
discussion in Section
4.7.