A Roadmap to Accounting for Share-Based Payment Awards€¦ · basis for any decision or action...

A Roadmap to Accounting for Share-Based Payment AwardsNovember 2020

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The FASB Accounting Standards Codification® material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, and is reproduced with permission.

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Publications in Deloitte’s Roadmap Series

Business Combinations

Business Combinations — SEC Reporting Considerations

Carve-Out Transactions

Comparing IFRS Standards and U.S. GAAP

Consolidation — Identifying a Controlling Financial Interest

Contingencies, Loss Recoveries, and Guarantees

Contracts on an Entity’s Own Equity

Convertible Debt

Current Expected Credit Losses

Distinguishing Liabilities From Equity

Earnings per Share

Environmental Obligations and Asset Retirement Obligations

Equity Method Investments and Joint Ventures

Equity Method Investees — SEC Reporting Considerations

Fair Value Measurements and Disclosures (Including the Fair Value Option)

Foreign Currency Transactions and Translations

Guarantees and Collateralizations — SEC Reporting Considerations

Impairments and Disposals of Long-Lived Assets and Discontinued Operations

Income Taxes

Initial Public Offerings

Leases

Noncontrolling Interests

Non-GAAP Financial Measures and Metrics

Revenue Recognition

SEC Comment Letter Considerations, Including Industry Insights

Segment Reporting

Share-Based Payment Awards

Statement of Cash Flows

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Contents

Preface xv

Contacts xvii

Chapter 1 — Overview 11.1 Objective� 1

1.2 Substantive�Terms� 1

1.3 Scope� 2

1.4 Recognition� 3

1.5 Measurement� 5

1.6 Classification� 6

1.7 Nonpublic�Entities� 6

1.7.1 Calculated Value 7

1.7.2 Intrinsic Value 7

1.7.3 Expected Term 7

1.7.4 Transition to Public Entity 7

1.8 Comparison�With�IFRS�Standards� 8

Chapter�2�—�Scope� 92.1 General� 9

2.2 Definition�of�Employee� 13

2.3 Nonemployee�Directors� 16

2.3.1 Parent-Entity Directors 16

2.3.2 Subsidiary Directors 16

2.4 Nonemployee�Awards� 17

2.5 Economic�Interest�Holders� 17

2.5.1 Investor Purchases of Shares From Grantees 18

2.5.2 Share-Based Payments in an Economic Interest Holder’s Equity 18

2.6 Profits�Interests� 20

2.7 Rabbi�Trusts� 23

2.7.1 Accounting for a Deferred Compensation Arrangement as Two Plans (Plans C and D) 24

2.7.2 Accounting for a Deferred Compensation Arrangement as One Plan (Plans C and D) 25

2.8 Consolidated�Financial�Statements� 25

2.9 Separate�Financial�Statements� 26

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2.10 Equity�Method�Investments� 28

2.10.1 Accounting in the Financial Statements of the Contributing Investor Issuing the Awards 32

2.10.2 Accounting in the Financial Statements of the Investee Receiving the Awards 32

2.10.3 Accounting in the Financial Statements of the Noncontributing Investors 32

2.10.4 Accounting in the Financial Statements of the Contributing Investor Receiving the Reimbursement 33

2.10.5 Accounting in the Financial Statements of the Investee Receiving the Awards and Making the Reimbursement 33

2.10.6 Accounting in the Financial Statements of the Noncontributing Investors (When the Investee Reimburses the Contributing Investor) 33

2.11 Unrelated�Entity�Awards� 33

2.12 Escrowed�Share�Arrangements� 36

Chapter�3�—�Recognition� 383.1 General�Recognition�Principles� 38

3.2 Determining�the�Grant�Date� 39

3.2.1 Approval 42

3.2.2 Communication Date 43

3.2.3 Unknown Vesting Conditions 44

3.2.4 Unknown Exercise Price 46

3.2.5 Discretionary Provisions 48

3.2.6 Awards Settled in a Variable Number of Shares 49

3.3 Nonvested�Shares�Versus�Restricted�Shares� 49

3.4 Vesting�Conditions�� 50

3.4.1 Service Condition 51

3.4.1.1 Estimating Forfeitures 54

3.4.1.2 Accounting for Forfeitures When They Occur 60

3.4.2 Performance Condition 62

3.4.2.1 Performance Conditions Associated With Liquidity Events 64

3.4.2.2 Performance Conditions Satisfied After the Requisite Service Period or the Nonemployee’s Vesting Period 65

3.4.3 Repurchase Features That Function as Vesting Conditions 66

3.5 Market�Condition� 68

3.6 Requisite�Service�Period�for�Employee�Awards� 70

3.6.1 Explicit Service Period for Employee Awards 73

3.6.2 Implicit Service Period for Employee Awards 73

3.6.3 Derived Service Period for Employee Awards 74

3.6.4 Service Inception Date 75

3.6.4.1 Award Authorization 77

3.6.4.2 Service Begins 78

3.6.4.3 No Substantive Future Requisite Service as of the Grant Date 79

3.6.4.4 Forfeiture Because a Market or Performance Condition Was Not Satisfied Before the Grant Date 79

3.6.4.5 Recognition of Compensation Cost 81

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Deloitte | A Roadmap to Accounting for Share-Based Payment Awards (2020)

3.6.5 Graded Vesting for Employee Awards 81

3.6.6 Nonsubstantive Service Condition for Employee Awards 89

3.6.6.1 Retirement Eligibility 89

3.6.6.2 Noncompete Agreements 90

3.6.6.3 Deep Out-of-the-Money Stock Options 94

3.7 Multiple�Conditions�for�Employee�Awards�� 95

3.7.1 Only One Condition Must Be Met — Employee Awards 100

3.7.2 Multiple Conditions Must Be Met — Employee Awards 102

3.7.2.1 Liquidity Event and Target IRR 106

3.7.2.2 Multiple Performance Conditions That Affect Vesting and Nonvesting Factors 106

3.7.3 Multiple Conditions and Multiple Service Periods — Employee Awards 107

3.7.3.1 Multiple Performance Conditions and Multiple Service Periods 107

3.7.3.2 Multiple Service Periods Related to Exercise Price 108

3.7.3.3 Multiple Service Periods Related to Transferability 109

3.8 Changes�in�Estimate�for�Employee�Awards�� 110

3.9 Clawback�Features�� 112

3.10 Dividend�Protected�Awards� 115

3.11 Nonrecourse�and�Recourse�Notes� 119

3.11.1 Recourse Notes 119

3.11.2 Nonrecourse Notes 119

3.11.3 Changes Made to the Note 120

3.11.4 In-Substance Nonrecourse Note 120

3.11.5 Combination Recourse and Nonrecourse Loan 121

3.12 Employee�Payroll�Taxes�� 121

3.13 Capitalization�of�Compensation�Cost�� 121

Chapter�4�—�Measurement� 1224.1 Fair-Value-Based�Measurement�� 122

4.1.1 Vesting Conditions 123

4.1.2 Reload and Contingent Features 125

4.2 Measurement�Objective� 127

4.3 Observable�Market�Price� 131

4.4 Measurement�Date� 132

4.5 Market�Conditions� 132

4.6 Conditions�That�Affect�Factors�Other�Than�Vesting�or�Exercisability� 137

4.6.1 Market, Performance, and Service Conditions 138

4.6.2 Other Conditions 145

4.7 Nonvested�Shares� 145

4.8 Restricted�Shares� 146

4.8.1 Options on Restricted Shares 148

4.8.2 Limited Population of Transferees 149

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Contents

4.9 Option�Pricing�Models� 149

4.9.1 Change in Valuation Technique 153

4.9.2 Assumptions in an Option Pricing Model 155

4.9.2.1 Risk-Free Interest Rate 158

4.9.2.2 Expected Term 158

4.9.2.3 Expected Volatility 171

4.9.2.4 Expected Dividends 182

4.9.2.5 Credit Risk and Dilution 183

4.9.3 Market-Based Measure of Stock Options 184

4.10 Valuation�of�Awards�With�Graded�Vesting�Schedule� 184

4.11 Difficulty�of�Estimation�� 185

4.12 Valuation�of�Nonpublic�Entity�Awards� 186

4.12.1 Cheap Stock 186

4.12.2 ISOs, NQSOs, and Internal Revenue Code Section 409A 187

4.12.3 Purchases of Shares From Employees 189

4.12.3.1 Entity Purchases of Shares From Employees 189

4.12.3.2 Investor Purchases of Shares From Grantees 189

4.12.4 Interpolation Considerations for Valuing Share-Based Compensation 194

4.13 Practical�Expedients�for�Nonpublic�Entities� 198

4.13.1 Application 198

4.13.1.1 Fair-Value-Based Measurement Exceptions 198

4.13.1.2 Expected-Term Practical Expedient 199

4.13.2 Calculated Value 199

4.13.3 Intrinsic Value 203

4.13.4 Transition From Nonpublic to Public Entity Status 206

Chapter�5�—�Classification� 2105.1 General� 210

5.2 ASC�480�� 212

5.2.1 ASC 480 Scope Exceptions That Apply to Share-Based Payments Within the Scope of ASC 718 216

5.3 Share�Repurchase�Features� 216

5.3.1 Repurchase Features — Puttable Stock Awards 219

5.3.1.1 Repurchase Features — Noncontingent Puttable Stock Awards 220

5.3.1.2 Repurchase Features — Contingently Puttable Stock Awards 223

5.3.2 Repurchase Features — Callable Stock Awards 225

5.3.2.1 Repurchase Features — Noncontingent Callable Stock Awards 226

5.3.2.2 Repurchase Features — Contingently Callable Stock Awards 228

5.3.3 Book-Value Plans for Employees 230

5.3.4 Repurchase Features That Function as Vesting Conditions or Clawback Features 231

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5.4 Stock�Options�� 231

5.4.1 Classification of Underlying Shares 231

5.4.2 Cash Settlement Features 231

5.4.2.1 Noncontingent Cash Settlement Features (Including Tandem and Combination Awards) 235

5.4.2.2 Contingent Cash Settlement Features 238

5.4.2.3 Early Exercise of a Stock Option or Similar Instrument 239

5.4.3 Net Share Settlement Features 240

5.4.4 Broker-Assisted Cashless Exercise 240

5.5 Indexation�to�Other�Factors� 241

5.6 Substantive�Terms�� 243

5.7 Exceptions�to�Liability�Classification� 244

5.7.1 Foreign Currency 244

5.7.2 Statutory Tax Withholding Obligation 245

5.7.2.1 Hypothetical Withholdings 246

5.7.2.2 Cash Settlement of Fractional Shares 246

5.7.2.3 Changes in the Amount Withheld 246

5.7.2.4 Nonemployee Director Tax Withholdings 247

5.8 Awards�That�Become�Subject�to�Other�Guidance� 247

5.8.1 Awards Modified When the Grantee Is No Longer Providing Goods or Services 249

5.8.2 Equity Restructurings 249

5.9 Change�in�Classification�Due�to�Change�in�Probable�Settlement�Outcome� 250

5.10 SEC�Guidance�on�Temporary�Equity� 251

Chapter�6�—�Modifications� 2616.1 Accounting�for�the�Effects�of�Modifications�� 261

6.1.1 The Fair Value Assessment 270

6.1.1.1 Determining Whether a Fair Value Calculation Is Required 270

6.1.1.2 Considering Whether Compensation Cost Recognized Has Changed 270

6.1.1.3 Determining the Unit of Account 270

6.1.1.4 Determining Whether the Fair Value Is the Same Before and After Modification 271

6.1.2 Examples of Changes for Which Modification Accounting Would or Would Not Be Required 272

6.1.3 Tax Effects of Award Modifications 273

6.2 Modification�Date�� 273

6.3 Impact�of�Vesting�Conditions� 274

6.3.1 Probable-to-Probable Modifications 276

6.3.2 Probable-to-Improbable Modifications 278

6.3.3 Improbable-to-Probable Modifications 280

6.3.3.1 Modification in Connection With a Termination — Entity Elects to Estimate Forfeitures 282

6.3.3.2 Modification in Connection With a Termination — Entity Elects to Account for Forfeitures When They Occur 284

6.3.4 Improbable-to-Improbable Modification 285

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Contents

6.3.5 Modifications to Accelerate Vesting of Deep Out-of-the-Money Stock Options 288

6.3.6 Modification of the Employee’s Requisite Service Period 289

6.3.6.1 Modification to Reduce the Employee’s Requisite Service Period of an Award 289

6.3.6.2 Modification to Increase the Employee’s Requisite Service Period of an Award 290

6.3.7 Determining the Unit of Account When Assessing the Type of Modification 291

6.4 Modification�of�Factors�Other�Than�Vesting�Conditions�� 293

6.4.1 Modification of a Market Condition 293

6.4.2 Modification of Stock Options During Blackout Periods 294

6.5 Equity�Restructuring�� 294

6.5.1 Antidilution Provisions 295

6.5.1.1 Original Award Contains a Nondiscretionary Antidilution Provision 295

6.5.1.2 Modification to Add a Nondiscretionary Antidilution Provision in Contemplation of an Equity Restructuring 297

6.5.1.3 Modification to Add a Nondiscretionary Antidilution Provision That Is Not in Contemplation of an Equity Restructuring 298

6.5.2 Spin-Offs 299

6.5.2.1 Attribution of Compensation Cost in a Spin-Off 299

6.5.2.2 Classification of Awards in a Spin-Off 300

6.5.2.3 Determining the Market Price Before and After a Spin-Off 300

6.5.3 Accounting for Awards Modified in Conjunction With an Equity Restructuring Held by Individuals No Longer Employed or Providing Goods or Services 301

6.6 Business�Combination�� 301

6.7 Short-Term�Inducements�� 302

6.8 Modifications�That�Result�in�a�Change�in�Classification� 303

6.8.1 Modification From an Equity Award to a Liability Award 303

6.8.2 Modification From a Liability Award to an Equity Award 309

6.9 Modifications�Under�ASR�268� 313

6.10 Repurchases�and�Settlements�� 317

6.10.1 Cash Settlements 318

6.10.2 Cash Settlements Versus Modifications 322

6.11 Cancellations�� 326

6.12 Modifications�That�Change�the�Scope�of�Awards�� 328

6.13 Modifications�When�a�Holder�Is�No�Longer�an�Employee,�a�Nonemployee�Is�No�Longer� Providing�Goods�or�Services,�or�a�Grantee�Is�No�Longer�a�Customer� 329

Chapter�7�—�Liability-Classified�Awards� 3327.1 Fair-Value-Based�Measurement� 332


7.2.1 Cash-Settled SARs 334

7.2.2 Liability-Classified Awards With Market Conditions 337

7.3 Intrinsic-Value�Practical�Expedient�for�Nonpublic�Entities� 338

7.4 Modifications� 340

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Chapter�8�—�Employee�Stock�Purchase�Plans� 3438.1 Scope� 343

8.2 Noncompensatory�Plans� 344

8.2.1 First Condition in ASC 718-50-25-1 344

8.2.2 Second Condition in ASC 718-50-25-1 346

8.2.3 Third Condition in ASC 718-50-25-1 347

8.3 Requisite�Service�Period� 347

8.4 Forfeitures� 350

8.5 Measurement�� 351

8.6 Changes�in�Employee�Withholdings� 351

8.6.1 Increase in Withholdings 352

8.6.2 Decrease in Withholdings 352

8.7 Look-Back�Plans� 353

8.7.1 Basic Look-Back Plans 355

8.7.2 Variable Versus Maximum Number of Shares 358

8.7.3 Multiple Purchase Periods 360

8.7.4 Reset or Rollover Mechanisms 360

8.7.5 Retroactive Cash Infusion Election 362

Chapter�9�—�Nonemployee�Awards� 3639.1 Overview�—�After�the�Adoption�of�ASU�2018-07� 366

9.2 Scope�—�After�the�Adoption�of�ASU�2018-07� 367

9.2.1 Sales Incentives to Customers — Before the Adoption of ASU 2019-08 369

9.3 Recognition�—�After�the�Adoption�of�ASU�2018-07� 370

9.3.1 Attribution of Cost 373

9.3.1.1 Recognition as if Cash Were Paid 373

9.3.1.2 Graded Vesting Awards 373

9.3.2 Vesting Conditions 374

9.3.2.1 Service Condition 374

9.3.2.2 Performance Condition 376

9.4 Measurement�—�After�the�Adoption�of�ASU�2018-07� 379

9.4.1 Contractual Term Versus Expected Term 380

9.4.2 Practical Expedients for Nonpublic Entities 381

9.4.2.1 Expected Term 381

9.4.2.2 Calculated Value 383

9.4.2.3 Intrinsic Value 383

9.5 Classification�—�After�the�Adoption�of�ASU�2018-07� 384

9.6 Nonemployee�Awards�Exchanged�in�a�Business�Combination�—�After�the�Adoption�of�ASU�2018-07� 389

9.7 Presentation�—�After�the�Adoption�of�ASU�2018-07� 392

9.8 Disclosures�—�After�the�Adoption�of�ASU�2018-07� 394

9.9 Nonemployees�of�an�Equity�Method�Investee�—�After�the�Adoption�of�ASU�2018-07� 394

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Contents

9.10 Adoption�of�ASU�2018-07� 398

9.10.1 Transition and Related Disclosures 400

9.10.2 Adoption in an Interim Period 400

9.10.2.1 Determining the Adoption Date 400

9.10.2.2 Practical Application 401

9.11 Overview�—�Before�the�Adoption�of�ASU�2018-07�� 407

9.12 Scope�—�Before�the�Adoption�of�ASU�2018-07� 409

9.13 Measurement�—�Before�the�Adoption�of�ASU�2018-07� 411

9.13.1 Fair-Value-Based Measurement Versus Fair Value of Goods or Services Received 412

9.13.2 Measurement Date 413

9.13.2.1 Performance Commitment 413

9.13.2.2 Performance Is Complete 416

9.13.2.3 Fully Vested, Nonforfeitable Instruments 417

9.13.3 Measurement if Quantity and Terms Are Known Up Front 417

9.13.4 Measurement if Quantity and Terms Are Not Known Up Front 420

9.13.4.1 Counterparty Performance Conditions 421

9.13.4.2 Market Conditions 425

9.13.4.3 Both Counterparty Performance Conditions and Market Conditions 427

9.13.5 Calculated Value and Intrinsic Value 429

9.13.6 Expected Term 429

9.14 Recognition�—�Before�the�Adoption�of�ASU�2018-07� 430

9.14.1 Recognition of Goods and Services 431

9.14.2 Forfeitures 432

9.14.3 Fully Vested, Nonforfeitable Awards 432

9.15 Classification�—�Before�the�Adoption�of�ASU�2018-07� 433

9.16 Liability-Classified�Awards�—�Before�the�Adoption�of�ASU�2018-07� 433

9.17 Modifications�—�Before�the�Adoption�of�ASU�2018-07� 434

9.18 Accounting�Once�Performance�Is�Complete�—�Before�the�Adoption�of�ASU�2018-07� 434

9.19 Analogy�to�ASC�718�—�Before�the�Adoption�of�ASU�2018-07� 438

9.20 Presentation�—�Before�the�Adoption�of�ASU�2018-07� 439

9.20.1 Balance Sheet 440

9.20.2 Statement of Operations 440

9.21 Disclosures�—�Before�the�Adoption�of�ASU�2018-07� 441

Chapter�10�—�Business�Combinations� 44210.1 Replacement�of�Acquiree�Awards� 442

10.2 Allocating�Replacement�Awards�Between�Consideration�Transferred�and� Postcombination�Compensation�Cost� 443

10.2.1 Allocation Steps 450

10.2.1.1 Considerations Related to Step 1 452



10.2.2 Forfeitures 454

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10.2.3 Employee Awards With a Graded Vesting Schedule 455

10.3 Changes�Reflected�in�Postcombination�Compensation�Cost� 457

10.3.1 Changes in Forfeiture Estimates or Actual Forfeitures in the Postcombination Period 458

10.3.2 Changes in the Probability of Meeting a Performance Condition in the Postcombination Period 466

10.4 Acceleration�of�Vesting�Upon�a�Change�in�Control� 469

10.4.1 Acquirer Accelerates Vesting 469

10.4.2 Acceleration of Vesting Included in the Original Terms of the Awards 470

10.4.3 Modification to the Original Terms of the Awards to Add a Change-in-Control Provision in Contemplation of a Business Combination 471

10.5 Cash�Settlement�Upon�a�Change�in�Control� 472

10.5.1 Acquirer Cash Settles the Acquiree’s Awards (Cash-Settlement Provision Is Not Included in the Original Terms of the Award) 473

10.5.1.1 Fully Vested Awards That Are Cash Settled Upon a Change in Control 473

10.5.1.2 Partially Vested Awards That Are Cash Settled Upon a Change in Control 473

10.5.2 Cash-Settlement Provision Is Included in the Original Terms of the Award 473

10.5.2.1 Fully Vested Awards That Are Cash Settled Upon a Change in Control 474

10.5.2.2 Partially Vested Awards That Are Cash Settled Upon a Change in Control 474

10.6 Arrangements�for�Contingent�Payments�to�Employees�or�Selling�Shareholders� 475

10.7 Compensation�Arrangements� 475

10.7.1 Arrangements to Pay an Acquiree’s Employee Upon a Change in Control 476

10.7.2 Dual- or Double-Trigger Arrangements 477

10.7.3 Arrangements to Reallocate Forfeited Awards or Amounts to Remaining Shareholders/Employees 478

10.8 Tax�Effects�of�Replacement�Awards�Issued�in�a�Business�Combination� 479

Chapter�11�—�Income�Tax�Accounting� 480

Chapter 12 — Presentation 48212.1 Statement�of�Financial�Position� 482

12.1.1 Receivables 482

12.1.2 Deferred Tax Assets 483

12.1.3 Capitalization of Inventory 484

12.1.4 Fully Vested Nonemployee Awards 484

12.1.5 Presentation of Awards With Repurchase Features That Function as Vesting Conditions 484

12.2 Statement�of�Operations� 485

12.2.1 Classification of Compensation Expense 485

12.2.2 Share-Based Payment Awards Granted to Employees and Nonemployees of an Equity Method Investee 486

12.2.3 Nonemployee Awards Issued in Exchange for Goods or Services 487

12.2.4 Payroll Taxes 487

12.3 Statement�of�Cash�Flows� 487

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Contents

12.4 Earnings�per�Share� 488

12.4.1 Basic EPS 489

12.4.2 Diluted EPS 489

12.4.2.1 Treasury Stock Method 492

12.4.2.2 Service Conditions 503

12.4.2.3 Performance and Market Conditions 504

12.4.3 Participating Securities and the Two-Class Method 509

12.4.3.1 Participating Securities 512

12.4.3.2 Computation Under the Two-Class Method 514

12.4.4 Settlement in Shares or Cash 527

12.4.5 Early Exercise of Stock Options 531

12.4.5.1 Basic EPS 531

12.4.5.2 Diluted EPS 532

12.4.6 Employee Stock Purchase Plans 532

12.4.7 Redeemable Awards 533

12.4.7.1 Share-Based Payment Awards Redeemable at Fair Value 534

12.4.7.2 Share-Based Payment Awards Redeemable at an Amount Other Than Fair Value 534

12.4.7.3 Share-Based Payment Awards Redeemable at Intrinsic Value 534

12.4.7.4 Contingently Redeemable Share-Based Payment Awards 535

12.4.8 Awards of a Consolidated Subsidiary 535

12.4.8.1 Share-Based Payment Awards Issued by a Consolidated Subsidiary and Settled in the Subsidiary’s Common Shares 535

12.4.8.2 Share-Based Payment Awards Issued by a Subsidiary but Settled in the Parent’s Common Shares 539

Chapter�13�—�Disclosure� 54013.1 Disclosure�Objective� 540

13.2 Minimum�Disclosures� 540

13.3 Examples�of�Required�Disclosures� 543

13.4 Interim�Reporting� 547

13.5 Subsidiary�Disclosures� 548

13.6 Nonemployee�Awards� 549

13.7 Change�in�Valuation�Techniques� 549

13.8 Transition�From�Nonpublic�to�Public�Entity�Status� 550

13.9 MD&A�Disclosures�—�Expected�Volatility� 553

Chapter�14�—�Accounting�for�Share-Based�Payments�Issued�as�Sales� Incentives�to�Customers� 55414.1 Background� 554

14.2 Overview� 554

14.3 Scope� 555

14.4 Initial�Measurement� 556

14.5 Classification� 558

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14.6 Subsequent�Measurement�and�Presentation� 559

14.6.1 Equity-Classified Share-Based Payments 560

14.6.2 Liability-Classified Share-Based Payments 562

14.6.3 Practical Expedients for Nonpublic Entities 562


14.8 Disclosure� 564

14.9 Transition�and�Effective�Date�of�ASU�2019-08� 564

14.9.1 Transition and Related Disclosure 564

14.9.2 Effective Date 565

Appendix�A�—�Comparison�of�U.S.�GAAP�and�IFRS�Standards� 566

Appendix�B�—�Titles�of�Standards�and�Other�Literature� 572

Appendix�C�—�Abbreviations� 576

Appendix�D�—�Changes�Made�in�the�2020�Edition�of�This�Publication� 577

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Preface

November 2020

To our clients, colleagues, and other friends:

We are pleased to present the 2020 edition of A Roadmap to Accounting for Share-Based Payment Awards. This Roadmap provides Deloitte’s insights into and interpretations of the guidance on share-based payment arrangements in ASC 7181 (employee and nonemployee awards) as well as in other literature (e.g., ASC 260 and ASC 805).

In June 2018 the FASB issued ASU 2018-07, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. ASU 2018-07 aligns most of the guidance on nonemployee share-based payment awards with the requirements for employee share-based payment awards. Before adopting ASU 2018-07, entities used ASC 505-50 to account for share-based payment awards issued to nonemployees in exchange for goods or services. Accordingly, the ASU supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees.

It is assumed in this Roadmap that an entity has adopted ASU 2018-07. The changes to the accounting framework introduced by ASU 2018-07 are reflected throughout the Roadmap to align with the revised terminology and definitions in ASC 718. Chapter 9 addresses the accounting for nonemployee awards to the extent that it is different from the accounting for employee awards discussed throughout the Roadmap. Sections 9.1 through 9.10 are intended for entities that have adopted ASU 2018-07. However, Sections 9.11 through 9.21 continue to reflect the guidance an entity would apply before adopting ASU 2018-07.

In November 2019, the FASB issued ASU 2019-08, which clarifies the accounting for share-based payments issued as consideration payable to a customer under ASC 606. Under the ASU, entities apply the guidance in ASC 718 to measure and classify share-based payments issued to a customer that are not in exchange for a distinct good or service (i.e., share-based sales incentives).

The guidance in the Roadmap has been updated to reflect ASU 2019-08. However, the discussion of share-based-payments issued as sales incentives to customers is primarily included in Chapter 14. Section 9.2.1 provides guidance for entities that have not adopted ASU 2019-08.

For readers reporting under IFRS® Standards, we have updated Appendix A, which summarizes some of the significant differences between ASC 718 and IFRS 2 in the accounting for share-based payment awards. For a summary of all the substantive changes made to the Roadmap since our issuance of the previous edition, see Appendix D.

1 For the full titles of standards, topics, regulations, and abbreviations used in this publication, see Appendixes B and C. Note that this Roadmap does not cover the guidance on employee stock ownership plans in ASC 718-40.

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Note that this publication is not a substitute for the exercise of professional judgment, which is often essential to applying the accounting requirements for share-based payment awards. It is also not a substitute for consulting with Deloitte professionals on complex accounting questions and transactions.

Subscribers to the Deloitte Accounting Research Tool (DART) may access any interim updates to this publication by selecting the Roadmap from the Roadmap Series page on DART. If a “Summary of Changes Since Issuance” displays, subscribers can view those changes by clicking the related links or by opening the “active” version of the Roadmap.

We hope that you find this publication a valuable resource when considering the accounting guidance on share-based payment arrangements.

Sincerely,

Deloitte & Touche LLP

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Contacts

If you have questions about the information in this publication, please contact any of the following Deloitte professionals:

Sean May Partner Deloitte & Touche LLP +1 415 783 6930 [email protected]

Steve Barta Partner Deloitte & Touche LLP +1 415 783 6392 [email protected]

Ashley Carpenter Partner Deloitte & Touche LLP +1 203 761 3197 [email protected]

Mark Crowley Managing Director Deloitte & Touche LLP +1 203 563 2518 [email protected]

Bernard De Jager Partner Deloitte & Touche LLP +1 415 783 4739 [email protected]

Susan Fennedy Partner Deloitte & Touche LLP +1 415 783 7654 [email protected]

Sandie Kim Partner Deloitte & Touche LLP +1 415 783 4848 [email protected]

Ignacio Perez Managing Director Deloitte & Touche LLP +1 203 761 3379 [email protected]

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Aaron Shaw Partner Deloitte & Touche LLP +1 202 220 2122 [email protected]

Stefanie Tamulis Managing Director Deloitte & Touche LLP +1 203 563 2648 [email protected]

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Chapter 1 — Overview

1.1 Objective

ASC 718-10

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.

To incentivize employee and nonemployee performance and align the interests of grantees and shareholders, entities often grant share-based payment awards such as stock options, restricted stock,1 restricted stock units (RSUs), stock appreciation rights (SARs), and other equity-based instruments in exchange for goods or services or consideration paid to a customer. Such awards are a form of compensation. One of ASC 718’s objectives is for entities to recognize the cost of that compensation in their financial statements as the goods or services associated with the awards are provided. The amount of cost to recognize is generally based on the fair value of the share-based payment arrangement, and ASC 718 requires entities to apply a “fair-value-based measurement method” when accounting for such arrangements.2

1.2 Substantive Terms

ASC 718-10 — Glossary

Terms of a Share-Based Payment AwardThe contractual provisions that determine the nature and scope of a share-based payment award. For example, the exercise price of share options is one of the terms of an award of share options. As indicated in paragraph 718-10-25-15, the written terms of a share-based payment award and its related arrangement, if any, usually provide the best evidence of its terms. However, an entity’s past practice or other factors may indicate that some aspects of the substantive terms differ from the written terms. The substantive terms of a share-based payment award, as those terms are mutually understood by the entity and a party (either an employee or a nonemployee) who receives the award, provide the basis for determining the rights conveyed to a party and the obligations imposed on the issuer, regardless of how the award and related arrangement, if any, are structured. See paragraph 718-10-30-5.

1 ASC 718 refers to restricted stock (and RSUs) as nonvested shares (and nonvested share units). See Sections 3.3, 4.7, and 4.8 for a discussion of the differences between a nonvested share and a restricted share.

2 See Sections 1.7 and 4.13 for a discussion of exceptions for nonpublic entities to the fair-value-based measurement requirement.

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ASC 718-10

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.

25-4 Assessment of both the rights and obligations in a share-based payment award and any related arrangement and how those rights and obligations affect the fair value of an award requires the exercise of judgment in considering the relevant facts and circumstances.

It is important for an entity to consider all of an award’s terms when evaluating a share-based payment arrangement. While the written plan and agreement are generally the best evidence of the award’s terms, an entity’s past practice or other factors may indicate that the substantive terms differ from the written ones. For example, if an entity’s award agreement indicates that the award will be settled in shares of the entity’s stock, but the entity has made an oral promise to settle the award in cash or has a past practice of settling awards in cash, the substantive terms of the award would indicate that there is a cash settlement feature. The substantive terms that are mutually understood by the entity and the grantee provide the basis for determining the accounting irrespective of how the award and related agreements may be drafted or structured. This concept is illustrated in ASC 718-10-25-3, which indicates that a nonrecourse note received by an entity as consideration for the issuance of stock is, in substance, the same as the grant of stock options and therefore should be accounted for as a substantive grant of stock options. Another example of this concept is a feature that allows an entity to repurchase “vested” shares awarded in a share-based payment arrangement for no consideration if the grantee ceases providing goods or services before four years after the grant date of the awards. In this scenario, the repurchase feature functions, in substance, as a vesting condition.

1.3 ScopeASC 718 generally applies to share-based payments granted to employees or nonemployees in exchange for goods or services to be used or consumed in the grantor’s own operations. Only share-based payments that are issued in exchange for goods or services are within the scope of ASC 718. Further, such payments must be either (1) settled by issuing the entity’s equity shares or other equity instruments or (2) indexed, at least in part, to the value of the entity’s equity shares or other equity instruments. See Chapter 2 for a more detailed discussion of the scope of ASC 718.

Changing LanesRequirements Under ASU 2018-07It is assumed in this Roadmap that an entity has adopted ASU 2018-07, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. ASU 2018-07 aligns most of the guidance on nonemployee share-based payment awards with the requirements for employee share-based payment awards. Before adopting ASU 2018-07, entities used ASC 505-50 to account for share-based payment awards issued to nonemployees in exchange for goods or services. There were significant differences between that guidance and the guidance on employee awards under ASC 718, including those related to:

• The manner in which an entity determines the measurement date for equity-classified awards (which is the date the fair-value-based measure of the awards is determined and fixed).

https://www.fasb.org/cs/ContentServer?c=Document_C&cid=1176170789464&d=&pagename=FASB%2FDocument_C%2FDocumentPage

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• The treatment of performance conditions.• The manner in which an entity recognizes the cost of the awards and the period(s) of

recognition.

• The accounting for the awards once performance is complete (i.e., determining whether the awards are subject to other applicable GAAP).

While ASU 2018-07 superseded ASC 505-50, certain differences between employee share-based payment awards and nonemployee awards remain. For example:

• An entity may elect, on an award-by-award basis, to measure nonemployee stock options and similar instruments by using the contractual term of the award rather than the expected term.

• The cost associated with nonemployee awards should be recognized in the same period(s) and in the same manner as though the grantor had paid cash.

Because of these differences, it is still important for an entity to consider whether the counterparty in an arrangement is an employee or a nonemployee when accounting for share-based payment awards. See Chapter 9 for a discussion of awards granted to nonemployees.

Requirements Under ASU 2019-08 In November 2019, the FASB issued ASU 2019-08, which clarifies the accounting for share-based payments issued as consideration payable to a customer in accordance with ASC 606. Under the ASU, entities apply the guidance in ASC 718 to measure and classify share-based payments issued to a customer that are not in exchange for a distinct good or service (i.e., share-based sales incentives). Accordingly, entities use a fair-value-based measure to calculate such incentives on the grant date, which is the date on which the grantor (the entity) and the grantee (the customer) reach a mutual understanding of the key terms and conditions of the share-based consideration. The result is reflected as a reduction of revenue in accordance with the guidance in ASC 606 on consideration payable to a customer. After initial recognition, the measurement and classification of the share-based sales incentives continue to be subject to ASC 718 unless (1) the award is subsequently modified when vested and (2) the grantee is no longer a customer. See Chapter 14 for a more detailed discussion of ASU 2019-08, including transition provisions and effective dates of the amendments.3

To determine whether ASC 718 applies, an entity should evaluate transactions between (1) grantees that provide goods and services and (2) related parties or other economic interest holders of the entity. If a transaction is deemed to be compensation for goods or services, it is accounted for as a capital contribution to the entity and as a share-based payment arrangement between the entity and the grantee. See Section 2.4 for additional guidance.

1.4 RecognitionASC 718 requires compensation cost to be recognized over the employee’s requisite service period or the nonemployee’s vesting period. The requisite service period is the period during which the employee is required to provide services to earn the share-based payment award. The nonemployee’s vesting period is the period over which the cost of a nonemployee share-based payment award is recognized (i.e., the period the goods or services are provided). The service inception date, which is generally the grant date, is the beginning of the requisite service period or the nonemployee’s vesting period.

3 Share-based payments granted to employees or nonemployees in exchange for goods or services are discussed throughout this Roadmap. Share-based payments issued as consideration payable to a customer are discussed in Chapter 14.


4


Therefore, the service inception date is the date on which an entity begins to recognize compensation cost related to the share-based payments. For awards with only a service condition, the vesting period is generally the requisite service period or the nonemployee’s vesting period unless there are other substantive terms to the contrary. However, for nonemployee share-based payment awards, an entity should recognize compensation cost “when it obtains the goods or as services are received” and “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.” This is referred to within ASC 718 and this Roadmap as the “nonemployee’s vesting period.”

An employee’s requisite service period4 can be explicit, implicit, or derived, depending on the award’s terms and conditions:

• An explicit service period is stated in the terms of an award. For example, if the award vests after four years of continuous service, the explicit service period is four years.

• An implicit service period is not explicitly stated in the terms of the award but may be inferred from an analysis of those terms and other facts and circumstances that are typically associated with a performance condition. For example, if an award vests only upon the completion of a new product design and the design is expected to be completed two years from the grant date, the implicit service period is two years.

• A derived service period is inferred from the application of certain techniques used to value an award with a market condition. For example, if an award becomes exercisable when the market price of the entity’s stock reaches a specified level, and that specified level is expected to be achieved in three years (as inferred from the valuation technique), the derived service period is three years.

An award may contain more than one explicit, implicit, or derived service period (i.e., multiple conditions). However, it can have only one requisite service period, with the exception of a graded vesting award that is accounted for, in substance, as multiple awards; see Section 3.6.5. If an award contains multiple conditions, an entity may need to take into account the interrelationship of those conditions. Further, the entity must make an initial best estimate of the requisite service period as of the grant date, and it should revise that estimate as facts and circumstances change. Section 3.8 discusses how to account for a change in the estimated requisite service period.

Compensation cost is based on the number of awards that vest, which generally depends on satisfaction of the awards’ service conditions, performance conditions,5 or both. For service conditions, an entity can, separately for employee awards and nonemployee awards, make an entity-wide accounting policy election to either (1) estimate the total number of awards for which the good will not be delivered or the service will not be rendered (i.e., estimate the forfeitures expected to occur) or (2) account for forfeitures when they occur. If the entity elects the first option, it will estimate the likelihood that employees will terminate employment or nonemployees will cease providing goods or services before satisfying the service condition and factor this forfeiture estimate into the amount of compensation cost accrued (i.e., decrease the quantity of awards). It will then adjust the estimated quantity if facts and circumstances change so that the total amount of compensation cost recognized at the end of the employee’s requisite service period or the nonemployee’s vesting period is based on the number of awards for which the employee’s requisite service is rendered or the nonemployee’s goods or services are provided. If the entity elects the second option, it will reverse previously recognized compensation cost when a grantee

4 Determining the requisite service period is only applicable to employee awards. However, for certain nonemployee awards, an entity may analogize to the guidance on calculating a requisite service period and determining the service inception date when such guidance is relevant to the accounting for the nonemployee award. For additional discussion of a nonemployee’s vesting period, see Section 9.3.2.

5 There may be certain situations in which a service or performance condition does not affect the number of awards that vest and instead affects factors other than vesting, such as the exercise price or conversion ratio.

5


forfeits the award by terminating employment (for employee awards) or ceasing to provide goods or services (for nonemployee awards) before the grantee has satisfied the service condition.

For awards with performance conditions, an entity will need to assess the probability of meeting the performance condition and will only recognize compensation cost if it is probable that the performance condition will be met. The total compensation cost recognized will ultimately be based on the outcome of the performance condition.

If a grantee forfeits an award that contains a market condition because of failure to meet the market condition but delivers the promised good or renders the requisite service, compensation cost previously recognized is not reversed. Compensation cost is only reversed if the grantee does not deliver the promised good or render the requisite service, because a market condition is not considered a vesting condition. In determining the fair-value-based measurement of the award, an entity takes into account the likelihood that it will meet the market condition.

See Sections 3.4 and 3.5 for additional information about service, performance, and market conditions, and see Chapter 3 for detailed guidance on the recognition of compensation cost.

1.5 MeasurementShare-based payment transactions are measured on the basis of the fair value (or in certain situations, the calculated value or intrinsic value) of the equity instrument issued. As noted in Section 1.1, ASC 718 refers to a “fair-value-based” method for measuring the value of the share-based payment. Conceptually, the fair value determined under this method is not fair value as defined in ASC 820, which explicitly excludes share-based payments from its scope. Although fair value measurement techniques are used in the fair-value-based measurement method, it specifically excludes the effects of vesting conditions and other types of features (e.g., clawback provisions) that would be included in a fair value measurement that is based on ASC 820. Therefore, when the term “fair value” is used in ASC 718 and in this Roadmap, it refers to a fair-value-based measurement determined in accordance with the requirements of ASC 718.

For equity-classified awards, compensation cost is recognized over the employee’s requisite service period or the nonemployee’s vesting period on the basis of the fair-value-based measure of the awards on the grant date. The measurement of such awards is generally fixed on the grant date. By contrast, liability-classified awards are remeasured at their fair-value-based measurement as of each reporting date until settlement. That is, changes in the fair-value-based measure of the liability at the end of each reporting period are recognized as compensation cost, either (1) immediately or (2) over the employee’s requisite service period or the nonemployee’s vesting period. The total compensation cost ultimately recognized for liability-classified awards on the settlement date will generally equal the settlement amount (e.g., the amount of cash paid to settle the award).

Nonpublic entities can use certain practical expedients as a substitute for a fair-value-based measurement. See further discussion in Section 1.7. See Chapter 4 for additional guidance on the measurement of share-based payment awards.

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1.6 ClassificationAs described above, an entity’s measurement of compensation cost differs depending on whether the entity has determined that share-based payment awards are classified as equity or liabilities. An overarching principle in ASC 718 is that a share-based payment arrangement cannot be classified as equity unless the grantee is subject to the risks and rewards associated with equity share ownership for a reasonable period. Any terms and conditions that could result in cash settlement, settlement in other assets, or settlement in a variable number of shares should be carefully evaluated. In addition, indexation of share-based payments to a factor other than a service, performance, or market condition could result in liability classification. Further, all of an award’s substantive terms and conditions, as well as an entity’s past practices, should be assessed in the determination of whether the entity has the intent and ability to settle in shares. See Chapter 5 for a more detailed discussion of the classification of awards as either liabilities or equity.

1.7 Nonpublic Entities


Nonpublic EntityAny entity other than one that meets any of the following criteria:

a. Has equity securities that trade in a public market either on a stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally

b. Makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market

c. Is controlled by an entity covered by the preceding criteria.

An entity that has only debt securities trading in a public market (or that has made a filing with a regulatory agency in preparation to trade only debt securities) is a nonpublic entity.

Public Business EntityA public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.

a. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).

b. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.

c. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.

d. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.

e. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including notes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.

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ASC 718-10 — Glossary (continued)

Public Entity An entity that meets any of the following criteria:

a. Has equity securities that trade in a public market, either on a stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally

b. Makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market

c. Is controlled by an entity covered by the preceding criteria. That is, a subsidiary of a public entity is itself a public entity.

An entity that has only debt securities trading in a public market (or that has made a filing with a regulatory agency in preparation to trade only debt securities) is not a public entity.

Several practical expedients are available only to entities that meet the definition of a nonpublic entity in ASC 718. In determining whether it qualifies as a nonpublic entity and can therefore apply the practical expedients, an entity should note that the definition of a public entity is not the same as that of a public business entity, which is separately defined in ASC 718. While an entity uses the definitions of a public entity and a nonpublic entity to apply most of the guidance in ASC 718, it may also need to determine whether it meets the definition of a public business entity when adopting a new standard’s requirements.

1.7.1 Calculated ValueIf a nonpublic entity cannot reasonably estimate the fair-value-based measure of its options and similar instruments because estimating the expected volatility of its stock price is not practicable, it should use the historical volatility of an appropriate industry sector index to calculate the value of the awards. The resulting value is referred to as calculated value. See Section 4.13.2.

1.7.2 Intrinsic ValueFor liability-classified awards, a nonpublic entity can elect as an accounting policy to measure all of its liability-classified awards at either their intrinsic value or their fair-value-based measure. See Section 4.13.3 for additional information.

1.7.3 Expected TermA nonpublic entity can elect, as an entity-wide accounting policy, to use a practical expedient in estimating the expected term of certain options and similar instruments. That practical expedient can only be used for awards that meet certain conditions. See Sections 4.9.2.2.3 and 4.13.1.2 for additional information.

1.7.4 Transition to Public EntityA nonpublic entity that becomes a public entity can no longer use the practical expedients that are available to nonpublic entities, including calculated value and intrinsic value since public entities must use a fair-value-based measurement. In addition, the practical expedient used by nonpublic entities to determine the expected term of certain options and similar instruments is different from that used by public entities. See Section 4.13.4 for more information.

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1.8 Comparison With IFRS StandardsASC 718 is the primary source of guidance in U.S. GAAP on the accounting for employee and nonemployee share-based payment awards. IFRS 2 is the primary source of guidance on such awards under IFRS Standards. Although much of the U.S. GAAP guidance is converged with that in IFRS 2, there are some notable differences. See Appendix A for a discussion of those differences.

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Chapter 2 — Scope

2.1 General

ASC 718-10

Overall Guidance15-1 The Scope Section of the Overall Subtopic establishes the pervasive scope for all Subtopics of the Compensation — Stock Compensation Topic. Unless explicitly addressed within specific Subtopics, the following scope guidance applies to all Subtopics of the Compensation — Stock Compensation Topic, with the exception of Subtopic 718-50, which has its own discrete scope.

Entities15-2 The guidance in the Compensation — Stock Compensation Topic applies to all entities that enter into share-based payment 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:

a. 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.)

b. 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.

15-5 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.

a. Subparagraph superseded by Accounting Standards Update No. 2018-07. b. Subparagraph superseded by Accounting Standards Update No. 2019-08. c. 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.

10


ASC 718-10 (continued)

15-6 Paragraphs 805-30-30-9 through 30-13 provide guidance on determining whether share-based payment awards issued in a business combination are part of the consideration transferred in exchange for the acquiree, and therefore in the scope of Topic 805, or are for continued service to be recognized in the postcombination period in accordance with this Topic.

15-7 The guidance in the Overall Subtopic does not apply to equity instruments held by an employee stock ownership plan.

ASC 718 applies to all transactions in which an entity receives goods or services to be used or consumed in the entity’s own operations in exchange for share-based instruments. In such transactions, an entity effectively “pays” grantees in the form of share-based instruments for goods or services. Common examples of share-based payment awards include stock options, SARs, restricted stock,1 and RSUs. After the adoption of ASU 2018-07, share-based payment awards issued in exchange for goods or services to nonemployees are within the scope of ASC 718.

In November 2019, the FASB issued ASU 2019-08, which requires entities to apply ASC 718 to measure and classify share-based payments that are issued as consideration payable to a customer under ASC 606 and are not in exchange for distinct goods or services (i.e., share-based sales incentives). Because the ASU requires entities to recognize share-based sales incentives in accordance with ASC 606, the accounting for such awards is unique. See Chapter 14 for additional information.

ASC 718 does not apply to share-based instruments issued in exchange for cash or other assets (i.e., detachable warrants or similar instruments issued in a financing transaction) because such instruments are not issued in exchange for goods or services. Other share-based transactions, or aspects of these transactions, that are not within the scope of ASC 7182 include:

• Equity instruments issued as consideration in a business combination — ASC 718 does not address the accounting for equity instruments issued as consideration in a business combination. The measurement date for such equity instruments is described in ASC 805-30-30-7.

ASC 805 also provides guidance on determining what portion of share-based payment awards exchanged in a business combination is (1) part of the consideration transferred in a business combination or (2) related to service to be recognized in the postcombination period and therefore is within the scope of ASC 718. ASC 805-20-30-21, ASC 805-30-30-9 through 30-13, ASC 805-30-55-6 through 55-13, ASC 805-30-55-17 through 55-35, ASC 805-740-25-10 and 25-11, and ASC 805-740-45-5 and 45-6 provide guidance on share-based payment awards exchanged in connection with a business combination. See Chapter 10 for additional information.

• Options or warrants issued for cash or other than for goods or services — Financial instruments issued for cash or other financial instruments (i.e., other than for goods or services) are accounted for in accordance with the relevant literature on accounting for and reporting the issuance of financial instruments, such as ASC 815 and ASC 480.

• Detachable options or warrants issued in a financing transaction — ASC 470-20 describes how an entity should account for detachable warrants, or similar instruments, issued in a financing transaction.

1 ASC 718 refers to restricted stock (and RSUs) as nonvested shares (and nonvested share units).2 Employee stock ownership plans (ESOPs) are within the scope of ASC 718-40 and are not covered in this Roadmap. ASC 718-10-20 defines an

ESOP as “an employee benefit plan that is described by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 as a stock bonus plan, or combination stock bonus and money purchase pension plan, designed to invest primarily in employer stock. Also called an employee share ownership plan.” Entities should continue to account for ESOPs in accordance with ASC 718-40 or SOP 76-3. Although SOP 76-3 was not included in the Codification, entities may continue to apply it to shares acquired by ESOPs on or before December 31, 1992.

https://www.fasb.org/cs/ContentServer?c=Document_C&cid=1176170789464&d=&pagename=FASB%2FDocument_C%2FDocumentPagehttps://www.fasb.org/cs/ContentServer?c=Document_C&cid=1176173714334&d=&pagename=FASB%2FDocument_C%2FDocumentPage

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Chapter 2 — Scope

• Share-based awards that are granted to employees or nonemployees and settled in shares of an unrelated entity — ASC 815-10-45-10 and ASC 815-10-55-46 through 55-48 describe the accounting for stock options that are issued to grantees and indexed to and settled in publicly traded shares of an unrelated entity. See Section 2.11 for more information about the accounting for awards that are issued to grantees and indexed to and settled in shares of an unrelated entity.

Only share-based payment awards that are issued in exchange for goods or services are within the scope of ASC 718.3 Further, such awards must be either (1) settled by issuing the entity’s equity shares or other equity instruments or (2) indexed, at least in part, to the value of the entity’s equity shares or other equity instruments. In this context, the word “indexed” indicates that the value the grantee receives upon settlement of the award is, at least in part, determined on the basis of the value of the entity’s equity. For instance, an entity may award a cash-settled SAR that can only be settled in cash. In such circumstances, the amount of cash the grantee receives upon settlement of the award is based on the relationship of the market price of the entity’s equity shares to the exercise price of the award; therefore, the award is considered indexed to the entity’s equity and is within the scope of ASC 718.

Changing Lanes In June 2018, the FASB issued ASU 2018-07, which aligns most of the guidance on share-based payments granted to nonemployees with the requirements for share-based payments granted to employees. The ASU supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees.

Although ASU 2018-07 eliminates most of the accounting differences between employee and nonemployee awards, there remain some exceptions. See Sections 9.11 through 9.21 and Sections 9.1 through 9.10 for additional guidance on accounting for nonemployee share-based payment awards before and after adoption of the ASU, respectively.

For public business entities, ASU 2018-07’s amendments are effective for fiscal years beginning after December 15, 2018, including interim periods therein. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted if financial statements have not yet been issued (for public business entities) or have not yet been made available for issuance (for all other entities), but no earlier than the date the entity adopts ASC 606. If early adoption is elected, all of the ASU’s amendments must be adopted in the same period. In addition, if early adoption is elected in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

3 In November 2019, the FASB issued ASU 2019-08, which requires entities to apply ASC 718 to measure and classify share-based payments issued as consideration payable to a customer under ASC 606 that are not in exchange for distinct goods or services (i.e., share-based sales incentives). See Section 9.2.1 and Chapter 14 for additional information.


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Example 2-1

Entity A, a public entity, offers a long-term incentive plan (LTIP) to certain of its employees. At the beginning of each year, a target cash bonus based on a specific dollar amount is established for each employee. Each employee in the LTIP will receive a predetermined percentage of his or her target bonus at the end of three years on the basis of the total return on A’s stock price relative to that of its competitors over the three-year performance period. The return on A’s stock price is ranked with that of its competitors from the highest to the lowest performer. On the basis of A’s ranking, each employee will receive a percentage of his or her target bonus that increases or decreases as A’s ranking increases or decreases.

For example, at the beginning of the three-year performance period, A sets a target cash bonus of $100,000 for an employee. Entity A includes nine of its competitors in its peer group to establish a ranking. Depending on the ranking, the employee will receive a percentage that ranges from 0 percent to 200 percent of the target bonus. For instance, if A ranks first in stock price return, the employee will receive 200 percent of $100,000, or $200,000; if A ranks fifth, the employee will receive 100 percent of $100,000, or $100,000; and if A ranks tenth or last, the employee will not receive a bonus.

Because the bonus is settled only in cash, A’s obligation under the LTIP is classified as a share-based liability. The liability is based, in part, on the price of A’s shares. That is, the share-based liability is based on the return on A’s stock price relative to the returns on the stock prices of A’s competitors. While the bonuses to be paid are not linearly correlated to the return on A’s stock price, the amount of the bonus does depend on the return on A’s stock price relative to that of its competitors. Accordingly, the LTIP is within the scope of, and therefore is accounted for in accordance with, ASC 718. Under ASC 718-30-35-3, A “shall measure a liability award under a share-based payment arrangement based on the award’s fair value remeasured at each reporting date until the date of settlement.”

Informal discussions with the FASB staff support the conclusion that LTIPs can be within the scope of ASC 718.

If an award offers a grantee a fixed monetary amount that is settled in a variable number of an entity’s shares, the amount the grantee receives upon settlement of the award is not based on the value of the entity’s equity and therefore is not considered indexed to the entity’s own equity. However, the fixed monetary amount will be settled by issuing a variable number of the entity’s shares. Because the award is settled by issuing the entity’s own equity, the award is within the scope of ASC 718.

Example 2-2

An entity sets a bonus of $100,000 for its chief executive if the executive remains employed for a two-year period. The bonus will be settled by issuing enough equity shares whose value equals $100,000. Therefore, if the entity’s share price is $50 at the end of the second year, the entity will settle the bonus by issuing 2,000 ($100,000 bonus ÷ $50 share price) of the entity’s equity shares. This bonus award is within the scope of ASC 718 because it is settled by issuing the entity’s own equity.

Share-based payment awards that are indexed to or settled in something other than an entity’s shares may be within the scope of ASC 718. ASC 718-10-20 defines share-based payment arrangements, in part, as follows:

The term shares [in ASC 718-10-15-3] 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.

That is, the legal form of the entity’s award does not preclude it from being within the scope of ASC 718. In this context, the term “shares” broadly represents instruments that entitle the holder to share in the risks and rewards of the entity as an owner.

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Chapter 2 — Scope

Example 2-3

Trust Unit RightsAn entity may grant its employees trust unit rights to purchase a unit in a unit investment trust at a reduced exercise price. Upon exercise of the unit right, the holder receives publicly traded trust units, which are equal fractional undivided interests in the trust. The trust units are the only voting, participating equity securities of the trust. The trust structure is created to purchase and hold a fixed portfolio of securities or other assets, which represent the “trust portfolio.” The trust then distributes the income generated from the portfolio to the holders of the trust units. Therefore, owning a trust unit allows the holder to share in the appreciation of the trust portfolio. Common examples of this type of investment trust structure include mutual funds and real estate investment trusts.

While the entity is offering to issue unit rights, which are not legal securities themselves, the rights entitle the holder to trust units. Although these trust units are not “shares” in the strictest sense, they provide the holder with the risks and rewards of the entity as an owner (e.g., voting rights). Accordingly, this arrangement is within the scope of ASC 718.

Example 2-4

Phantom Stock PlansUnder a typical phantom stock plan, an employee is granted a theoretical number of units that are exercisable into common stock of the entity. These units are not legal securities themselves and usually are issued only on a memorandum basis. The units do not have voting rights with the common stockholders. The value of each phantom unit is based on the value of the entity’s stock and, therefore, appreciates and depreciates on the basis of fluctuations in the value of the entity’s stock.

The phantom stock unit holders do not have the same rights as a common stockholder (i.e., voting rights). However, because the phantom units are indexed to and settled in the entity’s equity, this arrangement is within the scope of ASC 718.

2.2 Definition of Employee


EmployeeAn individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (IRS) Revenue Ruling 87-41. A reporting entity based in a foreign jurisdiction would determine whether an employee-employer relationship exists based on the pertinent laws of that jurisdiction. Accordingly, a grantee meets the definition of an employee if the grantor consistently represents that individual to be an employee under common law. The definition of an employee for payroll tax purposes under the U.S. Internal Revenue Code includes common law employees. Accordingly, a grantor that classifies a grantee potentially subject to U.S. payroll taxes as an employee also must represent that individual as an employee for payroll tax purposes (unless the grantee is a leased employee as described below). A grantee does not meet the definition of an employee solely because the grantor represents that individual as an employee for some, but not all, purposes. For example, a requirement or decision to classify a grantee as an employee for U.S. payroll tax purposes does not, by itself, indicate that the grantee is an employee because the grantee also must be an employee of the grantor under common law.

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ASC 718-10 — Glossary (continued)

A leased individual is deemed to be an employee of the lessee if all of the following requirements are met:

a. The leased individual qualifies as a common law employee of the lessee, and the lessor is contractually required to remit payroll taxes on the compensation paid to the leased individual for the services provided to the lessee.

b. The lessor and lessee agree in writing to all of the following conditions related to the leased individual: 1. The lessee has the exclusive right to grant stock compensation to the individual for the employee

service to the lessee. 2. The lessee has a right to hire, fire, and control the activities of the individual. (The lessor also may

have that right.) 3. The lessee has the exclusive right to determine the economic value of the services performed by the

individual (including wages and the number of units and value of stock compensation granted).4. The individual has the ability to participate in the lessee’s employee benefit plans, if any, on the same

basis as other comparable employees of the lessee. 5. The lessee agrees to and remits to the lessor funds sufficient to cover the complete compensation,

including all payroll taxes, of the individual on or before a contractually agreed upon date or dates.

A nonemployee director does not satisfy this definition of employee. Nevertheless, nonemployee directors acting in their role as members of a board of directors are treated as employees if those directors were elected by the employer’s shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards granted to nonemployee directors for their services as directors. Awards granted to those individuals for other services shall be accounted for as awards to nonemployees.

ASC 718-10

Identifying an Employee of a Physician Practice Management Entity55-85A A physician practice management entity shall determine whether an employee of the physician practice is considered an employee of the physician practice management entity for purposes of determining the method of accounting for that person’s share-based compensation as follows:

a. An employee of a physician practice that is consolidated by the physician practice management entity shall be considered an employee of the physician practice management entity and its subsidiaries.

b. An employee of a physician practice that is not consolidated by the physician practice management entity shall not be considered an employee of the physician practice management entity and its subsidiaries.

Changing Lanes Before the adoption of ASU 2018-07, entities apply (1) ASC 718 to account for share-based payment arrangements with employees and (2) ASC 505-50 to account for those with nonemployees. While the ASU aligns most of the accounting requirements, there remain some differences, notably those related to the attribution of compensation cost and an entity’s election to measure a nonemployee stock option award by using the contractual term instead of the expected term (see further discussion in Section 9.1). Accordingly, in this Roadmap, the terms “employee” and “nonemployee” continue to be distinguished when there are accounting differences based on the grantee’s status before and after adoption of the ASU.

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Chapter 2 — Scope

Determining whether a grantee meets the definition of an employee under ASC 718 is important for certain aspects of the accounting for a share-based payment award. On the basis of an examination of cases and rules, the IRS issued Revenue Ruling 87-41, which establishes 20 criteria for determining whether an individual is an employee under common law. The degree of importance of each criterion varies depending on the context in which the services of an individual are performed. In addition, the criteria are designed as guides to help an entity determine whether an individual is an employee. An entity should ensure that the substance of an arrangement is not obscured by attempts to achieve a particular employment status. The criteria include the following:

• Instructions — “A worker who is required to comply with other persons’ instructions about when, where, and how he or she is to work is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions.”

• Continuing relationship — “A continuing relationship between the worker and the person or persons for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals.”

• Set hours of work — “The establishment of set hours of work by the person or persons for whom the services are performed is a factor indicating control.”

• Hiring, supervising, and paying assistants — “If the person or persons for whom the services are performed hire, supervise, and pay assistants, that factor generally shows control over the workers on the job. However, if one worker hires, supervises, and pays the other assistants pursuant to a contract under which the worker agrees to provide materials and labor and under which the worker is responsible only for the attainment of a result, this factor indicates an independent contractor status.”

• Working on the employer’s premises — “If the work is performed on the premises of the person or persons for whom the services are performed, that factor suggests control over the worker, especially if the work could be done elsewhere. . . . Work done off the premises of the person or persons receiving the services, such as at the office of the worker, indicates some freedom from control. However, this fact by itself does not mean that the worker is not an employee. The importance of this factor depends on the nature of the service involved and the extent to which an employer generally would require that employees perform such services on the employer’s premises. Control over the place of work is indicated when the person or persons for whom the services are performed have the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required.”

• Full-time employment requirement — “If the worker must devote substantially full time to the business of the person or persons for whom the services are performed, such person or persons have control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work. An independent contractor on the other hand, is free to work when and for whom he or she chooses.”

• Payment — “Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.”

See IRS Revenue Ruling 87-41 for additional information about assessing whether an individual is an employee under common law.

http://www.michigan.gov/documents/wca/wca_irs_revenue_ruling_87-41_390318_7.pdf

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2.3 Nonemployee Directors

ASC 718-10

Example 2: Definition of Employee55-89 This Example illustrates the evaluation as to whether an individual meets conditions to be considered an employee under the definition of that term used in this Topic.

55-90 This Topic defines employee as an individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (IRS) Revenue Ruling 87-41. An example of whether that condition exists follows. Entity A issues options to members of its Advisory Board, which is separate and distinct from Entity A’s board of directors. Members

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