Deloitte
Accounting Research Tool
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Chapter 5 — Accounting Matters

5.8 Share-Based Compensation

5.8 Share-Based Compensation

An entity that is preparing for an IPO may have a share-based compensation strategy designed to retain and attract employees and nonemployees. Share-based compensation often is in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, or an employee stock purchase plan (ESPP). In addition, an entity may use share-based compensation to purchase goods or services from third-party vendors or service providers. Management should consider the financial reporting implications associated with each of the various types of share-based compensation arrangements that an entity may enter into with employees and nonemployees. Additional topics that an entity undergoing an IPO often must consider include the valuation of share-based compensation, repurchase features, certain profit-sharing arrangements, performance conditions associated with liquidity events, modifications, employee loans, escrowed stock arrangements, EPS, and disclosures.

Footnotes

6
A nonpublic entity’s use of calculated value does not represent an accounting policy election, since a nonpublic entity must use calculated value to measure its awards if it is not practicable for it to estimate the expected volatility of its share price. Thus, once an entity is able to estimate the expected volatility of its own share price or it becomes a public entity, the entity should switch from using a calculated value to using a fair-value-based measure and should account for the change as a change in accounting estimate under ASC 250.
7
Cheap stock refers to the issuance of equity securities before an IPO in which the value of the shares is below the IPO price.
8
The definition of “public entity” in ASC 718 encompasses entities that make “a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market.” The definition therefore includes entities that have filed an initial registration statement with the SEC before the effective date of an IPO.
9
A significant demotion, a significant reduction in compensation, or a significant relocation is commonly considered a “good reason” for termination.
10
ASC 718-10-30-28 specifies that a share-based payment award with established performance targets that affect vesting and that could be achieved after a grantee completes the requisite service or a nonemployee’s vesting period (i.e., the grantee would be eligible to vest in the award regardless of whether the grantee is delivering goods or rendering service on the date the performance target could be achieved) should be treated as a performance condition that is a vesting condition. For example, the terms of an award to an employee may allow the award to vest upon completion of an IPO (i.e., the performance target) even if the IPO occurs after the employee has completed the requisite service period.
11
At the conference, the SEC staff noted that valuations that appear unusual may be attributable to the peer companies selected when a market approach is used. Specifically, the staff indicated that there are often inconsistencies between the peer companies used by registrants and those used by the underwriters, which result in differences in the valuations. Accordingly, the staff encouraged registrants to talk to the underwriters “early and often” to avoid such inconsistencies.