2.4 Share-Based Payments
ASC 815-40 — Glossary
Share-Based Payment Arrangements
An arrangement under which either of the following conditions is met:
- One or more suppliers of goods or services (including employees) receive awards of equity shares, equity share options, or other equity instruments.
- The entity incurs liabilities to suppliers 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 may be indexed to both the price of the entity’s shares and something other than either the price of the entity’s shares or a market, performance, or service condition.)
- The awards require or may require settlement by issuance of the entity’s shares.
The term shares includes various forms of ownership interest that may not take the legal form of securities (for example, partnership interests), as well as other interests, including those that are liabilities in substance but not in form. Equity shares refers only to shares that are accounted for as equity.
Also called share-based compensation arrangements.
ASC 815-40
15-3 The guidance in this Subtopic
does not apply to any of the following: . . .
b. Contracts that are issued to compensate grantees
in a share-based payment arrangement . . . .
Pending Content (Transition Guidance:
ASC 815-40-65-1)
15-3 The guidance in this Subtopic does not
apply to any of the following: . . .
b. Contracts that are issued to compensate
grantees in a share-based payment arrangement
within the scope of Topic 718 . . . .
15-5A The guidance in this
paragraph through paragraph 815-40-15-8 does not apply to
share-based payment awards within the scope of Topic 718 for
purposes of determining whether instruments are classified
as liability awards or equity awards under that Topic.
Equity-linked financial instruments issued to investors for
purposes of establishing a market-based measure of the
grant-date fair value of employee stock options are not
within the scope of Topic 718 themselves. Consequently, the
guidance in this paragraph through paragraph 815-40-15-8
applies to such market-based share-based payment stock
option valuation instruments for purposes of making the
determinations described in paragraph 815-40-15-5.
ASC 718-10
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.
Pending Content (Transition Guidance: ASC
815-40-65-1)
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.
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 . . . .
35-9A A convertible instrument
award granted to a nonemployee in exchange for goods or
services to be used or consumed in a grantor’s own
operations is subject to recognition and measurement
guidance in this Topic until the award is fully vested. Once
vested, a convertible instrument award that is equity in
form, or debt in form, that can be converted into equity
instruments of the grantor, shall follow recognition and
measurement through reference to other applicable generally
accepted accounting principles (GAAP), including Subtopic
470-20 on debt with conversion and other options.
Pending Content (Transition Guidance: ASC
815-40-65-1)
35-9A Paragraph superseded by Accounting
Standards Update No. 2020-06.
35-10 A freestanding financial
instrument 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.
Pending Content (Transition
Guidance: ASC 815-40-65-1)
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 815-40 does not apply to a share-based payment arrangement that
is within the scope of ASC 718. For example, it does not apply to a share-based
payment award granted to (1) an employee as compensation for rendering service, (2)
a nonemployee as compensation for the acquisition of goods or services by the
entity, or (3) a customer in conjunction with the entity’s sale of goods or services
that are within the scope of ASC 606. The entity would instead apply ASC 718 to
determine (1) whether the share-based payment arrangement should be classified as
equity or as a liability and (2) the appropriate accounting. However, ASC 815-40
does apply to equity-linked freestanding financial instruments that are issued to
nonemployee investors to establish a market-based measure of the grant-date fair
value of stock options because such arrangements are not within the scope of ASC 718
(see ASC 815-40-15-5A).
ASC 815-40 may also apply to an instrument that was originally
issued to a grantee in a share-based payment arrangement subject to ASC 718 if the
terms of the instrument are subsequently modified. 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, ASC
718 ceases to apply unless the modification is made solely to reflect an equity
restructuring and (1) in accordance with ASC 718-10-35-10A, “[t]here 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” and (2) “[a]ll holders of the same class of equity instruments . . .
are treated in the same manner.” If an instrument originally issued to a grantee in
a share-based payment arrangement subject to ASC 718 becomes subject to ASC 815-40,
the classification of the instrument as equity or as a liability may change. An
instrument originally issued to a grantee in a share-based payment arrangement
subject to ASC 718 that meets the conditions for liability classification under ASC
480-10 would be excluded from the scope of ASC 815-40 (see Section 2.3).
Before the adoption of ASU 2020-06, ASC 718-10-35-9A contains
guidance that applies specifically to a convertible instrument that is granted to a
nonemployee. Once a convertible debt instrument issued to a nonemployee is fully
vested, it is no longer within the scope of ASC 718. Paragraph BC23 of ASU 2018-07
states:
The Board received feedback indicating that
convertible instruments granted in exchange for goods or services (convertible
instrument awards) rarely occur in practice. As such, the Board decided to
preserve the current accounting result for convertible instrument awards rather
than delay the issuance of this Update by having to deliberate the accounting
for convertible instrument awards. The Board also noted that its current project
on distinguishing liabilities from equity (including convertible debt) is better
suited to address concerns, if any, with the current accounting model for
convertible instrument awards.
ASU 2020-06 deletes the guidance in ASC 718-10-35-9A. Thus, upon the
adoption of ASU 2020-06, convertible instruments granted to nonemployees generally
remain within the scope of ASC 718.
ASC 718-10-15-5 exempts from the scope of ASC 718 transactions
involving equity instruments granted to a lender or an 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, but it would be evaluated under ASC 815-40 and any other applicable
guidance (including ASC 480-10).