A Roadmap to Accounting for Share-Based Payment Awards. Third Edition April 2015

Transcription

1 A Roadmap to Accounting for Share-Based Payment Awards Third Edition April 2015

2 The FASB Accounting Standards Codification material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT , and is reproduced with permission. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. As used in this document, Deloitte means Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP, which are subsidiaries of Deloitte LLP. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2015 Deloitte Development LLC. All rights reserved.

3 Contents Preface 1 Executive Summary 2 Acknowledgments 4 Chapter 1 Overview & Scope 5 Objectives Definition of a Common Law Employee Accounting Differences Between Employee and Nonemployee Share-Based Payment Awards 8 Scope Share-Based Transactions That Are Not Within the Scope of ASC Scope of Long-Term Incentive Plans Share-Based Payment Awards That Are Settled in a Variable Number of Shares Scope Awards That Do Not Take the Legal Form of Securities Deferred Compensation Arrangements in Which the Amounts Earned Are Held in a Rabbi Trust Share-Based Payment Awards That Are Issued to Employees of a Consolidated Subsidiary and Indexed to and Settled in Parent-Company Equity Share-Based Payment Awards That Are Issued to Employees of the Parent and Indexed to and Settled in a Consolidated Subsidiary s Equity Share-Based Payment Awards That Are Issued to Employees of a Subsidiary and Indexed to and Settled in Another Subsidiary s Equity Share-Based Payment Awards That Are Issued to Employees of an Equity Method Investee and Indexed to and Settled in Equity of an Investor Share-Based Payment Awards That Are Issued to Employees of an Equity Method Investee and Indexed to and Settled in Equity of a Contributing Investor When the Investee Reimburses the Contributing Investor Accounting for Share Options in Non-Publicly-Traded Shares of an Unrelated Entity That Are Issued to Employees in Exchange for Future Services Accounting for Nonvested Shares of an Unrelated Entity That Are Issued to Employees in Exchange for Future Services Impact of Forfeitures on Instruments Indexed to and Settled in Shares of an Unrelated Entity 19 Chapter 2 Recognition 20 Recognition Principles for Share-Based Payment Transactions Impact of Recourse and Nonrecourse Notes In-Substance Nonrecourse Notes 23 Determining the Grant Date Substantive Plan Terms Conditions for Establishing a Grant Date With an Employee: General Conditions That Must Be Met to Establish a Grant Date With an Employee: Necessary Approvals 25 iii

4 Contents 2-06 Conditions for Establishing a Grant Date With an Employee: Approval Date Precedes the Communications Date Conditions That Must Be Met to Establish a Grant Date With an Employee: Mutual Understanding of Key Terms Exercise Price Known Conditions That Must Be Met to Establish a Grant Date With an Employee: Mutual Understanding of Key Terms Vesting Conditions Known Performance Conditions Established on a Future Date Establishing a Grant Date With an Employee When a Negative-Discretion Provision Is Included in the Terms of a Share-Based Payment Award Establishing the Grant Date of a Share-Based Payment Award for a Nonpublic Entity When Valuation Is Not Finalized 30 Determining Whether to Classify a Financial Instrument as a Liability or as Equity Types of Share-Based Payment Awards Requiring Liability Classification Applying the Classification Criteria in ASC 480 to Share-Based Payment Awards Determining When Share-Based Payment Awards Subject to ASC 718 Become Subject to Other Applicable GAAP Classifying Share-Based Payment Awards That Are Indexed to Something Other Than the Issuer s Equity Shares and Settled in a Variable Number of the Entity s Shares Determining the Classification of Puttable and Callable Share Awards Subject to ASC Impact of Noncontingent Repurchase Features on the Classification of Puttable Share Awards Impact of Contingent Repurchase Features on the Classification of Puttable Share Awards Impact of Noncontingent Repurchase Features Triggered by an Employer Call Option on the Classification of Share Awards Impact of Contingent Repurchase Features Triggered by an Employer Call Option on the Classification of Share Awards Applying ASR 268 and ASC S99-3A to Share-Based Payment Awards With Repurchase Features Applying ASR 268 and ASC S99-3A to Share Awards With Repurchase Features Example Early Exercise of an Option or Similar Instrument Repurchase Feature of an Early-Exercised Share-Based Payment Option or Similar Instrument Modification of an Early-Exercised Option or Similar Instrument Determining the Classification of Puttable or Callable Employee Share Options Subject to ASC Impact of Contingent Cash Settlement Features on the Classification of Employee Share Options Applying ASR 268 and ASC S99-3A to Employee Share Options With a Contingent Cash Settlement Feature Example Impact of Net Share Settlement Features on the Classification of Employee Share Options Impact of Features Linked to the Consumer Price Index on the Classification of Share-Based Payment Awards Factors to Consider When an Employer Can Choose the Method of Settlement in Determining the Classification of Employee Share Options (or Similar Instruments) Impact of the Cash Settlement of Fractional Shares as a Result of an Employer s Minimum Statutory Withholding Obligations on the Classification of Share-Based Payment Awards Impact of Changes in the Amount Withheld to Meet the Employer s Minimum Statutory Withholding Requirement on the Classification of Share-Based Payment Awards 52 Market, Performance, and Service Conditions 53 Payroll Taxes 53 Chapter 3 Initial Measurement 54 Fair-Value-Based 56 Measurement Objective Fair Value at Grant Date Selecting a Valuation Technique to Value Share-Based Payment Awards Using Multiple Valuation Techniques to Estimate the Fair-Value-Based Measure of Share-Based Payment Awards 58 iv

5 Contents 3-03 Changing Valuation Techniques Used to Value Share-Based Payment Awards SEC s Views on Using Market Instruments in the Fair-Value-Based Measurement of Employee Share Options Observable Market Price of a Share-Based Payment Award Effects of Inputs Used in Estimating the Fair-Value-Based Measure of a Share-Based Payment Award Factors to Consider in Estimating Expected Volatility of the Underlying Share Price in Valuing a Share-Based Payment Award SEC Staff s Views on the Computation of Historical Volatility of the Underlying Share Price in Valuing a Share-Based Payment Award SEC Staff s Views on the Extent of Reliance on Implied Volatility of the Underlying Share Price in Valuing a Share-Based Payment Option SEC Staff s Views on Relying Exclusively on Either Implied or Historical Volatility in Estimating Expected Volatility of the Underlying Share Price Estimating the Expected Term of an Award in Valuing a Share-Based Payment Option Simplified Method for Estimating the Expected Term of an Employee Share Option Share-Based Payment Awards That Do Not Qualify as Plain-Vanilla Employee Share Options 69 Factors or Restrictions That Affect the Determination of Fair Value at Grant Date Effect of Postvesting Restrictions on the Fair-Value-Based Measure of Employee Share Options Impact of Dividends Paid on Employee Share Options During the Vesting Period Accounting for Dividends Paid on Awards During Vesting Service Condition Performance Conditions Accounting for Share-Based Payment Awards With a Performance Condition That Are Granted to Retirement-Eligible Employees Market Condition Accounting for Share-Based Payment Awards When Vesting Is Contingent Upon a Liquidity Event and Upon the Achievement of a Specified Internal Rate of Return Multiple Performance Conditions Affecting Both Vesting Factors and Nonvesting Factors Effect of Service and Performance Conditions on Factors Other Than Vesting or Exercisability in Valuing a Share-Based Payment Award Difference Between a Nonvested Share and a Restricted Share Valuation of Nonvested Shares Effect of a Limited Population of Transferees on the Valuation of Nonvested Shares 84 Nonpublic Entity Calculated Value A Nonpublic Entity s Use of an Appropriate Industry Sector Index in Valuing a Share-Based Payment Award Nonpublic Entity s Selection and Computation of Historical Volatility of Appropriate Industry Sector Index Differences in the Way Public Entities and Nonpublic Entities Measure Share-Based Payment Awards 85 Difficulty of Estimation When It Is Not Reasonable to Estimate the Fair-Value-Based Measure of a Share-Based Payment Award as of the Grant Date 86 Reload and Contingent Features 87 Requisite Service Period Effect of Multiple Conditions on Vesting or Exercisability of a Share-Based Payment Award Nonsubstantive Service Conditions Due to Retirement Provisions Noncompete Arrangement as an In-Substance Service Condition 91 Market, Performance, and Service Conditions Effects of Service, Performance, Market, and Other Conditions on the Valuation of Share-Based Payment Awards 93 Liability Awards Measurement Objective and Measurement Date Accounting for Equity-Classified Awards Versus Liability-Classified Awards 94 v

6 Contents Chapter 4 Subsequent Measurement 98 Recognition of Compensation Costs Over the Requisite Service Period Accounting for Forfeitures Example Information Used to Estimate Forfeitures 103 Estimating the Requisite Service Period Derived Service Period Modification of a Share-Based Payment Award s Requisite Service Period Grant of a Fully Vested Deep Out-of-the-Money Share Option Award Determining Whether the Service Inception Date Precedes the Grant Date Accounting When Service Inception Date Precedes the Grant Date 108 Graded Vesting Awards Valuation Techniques and Accelerated Versus Straight-Line Attribution Examples Illustrating the Straight-Line Attribution Method for Graded Vesting Awards Graded Vesting Attribution Model Examples Attribution Method for Graded Vesting Awards With Both a Service and a Performance Condition Acceptability of Alternative Approach for Recognizing Compensation Cost for Graded Vesting Awards 112 Awards May Become Subject to Other Guidance Settlement of Liabilities Not Initially Subject to ASC 718 With Awards That Are Within the Scope of ASC Change in Classification Due to Change in Probable Settlement Outcome 115 Equity-Classified Awards Forfeiture of Vested Awards and Clawback Features 116 Modification of an Equity Award Accounting for the Modification of a Share-Based Payment Award Conditions for Establishing a Modification Date for an Employee Award Modification of Stock Options During Blackout Periods Modification That Changes an Award s Classification From Equity to Liability Modification That Changes an Award s Classification From Liability to Equity Liability-to-Equity Modification With a Decrease in the Fair-Value-Based Measure Modifications of Deep Out-of-the-Money Share Option Awards Modification of Awards With Performance and Service Vesting Conditions Modification of Vesting Conditions in Which Original Awards Are Expected to Vest (Probable-to-Probable) Example Modification of Vesting Conditions in Which Original Awards Are Not Expected to Vest (Improbable-to-Probable) Example Modification of Vesting Conditions in Which Original Awards Are Not Expected to Vest (Improbable-to-Improbable) Example Modification of a Market Condition Modification of Market Condition When Performance Condition Is Improbable Modification of an Award Accounted for Under ASR 268 and ASC S99-3A Inducements Accounting for Share-Based Payment Awards in an Equity Restructuring Impact of Antidilution Provisions Accounting for Share-Based Payment Awards in a Spin-Off Awards Held by Employees of the Former Subsidiary in the Equity of the Former Parent Accounting for Share-Based Payment Awards of Former Employees Awards Modified as a Result of a Spin-off Accounting for Share-Based Payment Awards in a Spin-Off Awards Modified to Become Indexed to the Equity of the Former Subsidiary Determining Market Price Before and After a Spin-Off 139 vi

7 Contents 4-35 Accounting for the Repurchase of an Equity Award Settlement of an Unvested Award for Less Than Its Fair-Value-Based Measure Distinguishing a Cash Settlement From a Modification That Changes an Award s Classification From Equity to Liability Modifications Versus Cancellations 144 Liability-Classified Awards Accounting Treatment of Liability Awards Change in Measuring Share-Based Liabilities From Intrinsic Value to Fair Value When Entity Becomes Public 147 Chapter 5 Disclosure 148 General Requirements Disclosure in Quarterly Financial Statements Disclosure Requirements for Changes in Valuation Techniques Related to Share-Based Payment Awards Disclosure in a Subsidiary s Stand-Alone Financial Statements SEC Views on MD&A Disclosures About Share-Based Compensation Disclosures in IPO Registration Statements 152 Chapter 6 Other Presentation 154 Statement of Operations Presentation of Share-Based Compensation on the Face of the Statement of Operations 156 Statement of Cash Flows Presentation in the Statement of Cash Flows of Cash Received Upon Early Exercise of a Share-Based Payment Award Presentation in the Statement of Cash Flows of the Settlement of Equity-Classified Share-Based Payment Awards Presentation in the Statement of Cash Flows of the Settlement of Liability-Classified Share-Based Payment Awards Presentation in the Statement of Cash Flows of the Income Tax Effects of Share-Based Payment Awards Presentation in the Statement of Cash Flows of Tax Benefit Deficiencies of Share-Based Payment Awards Presentation in the Statement of Cash Flows of Remittances of Minimum Statutory Withholding on Share-Based Payment Awards 160 Earnings per Share Application of the Treasury Stock Method to Share-Based Payment Awards Example Use of the Two-Class Method to Calculate Basic and Diluted Earnings per Share Examples Definition of a Participating Security Impact of Dividend-Paying Share-Based Payment Awards on Earnings per Share Impact of Share-Based Payment Awards That Cannot Be Settled in an Entity s Shares on Earnings per Share Impact of Forfeitures on Diluted Earnings per Share Impact of Redeemable Share-Based Payment Awards on Earnings per Share Impact on EPS Calculation of Share-Based Payment Awards That Can Be Settled in Cash or Shares Impact of Share-Based Payment Awards With Performance or Market Conditions on Earnings per Share Impact of Nonvested Shares on Earnings per Share Impact of Share-Based Payment Awards of a Consolidated Subsidiary on Earnings per Share Inclusion of Out-of-the-Money Share-Based Payment Awards Under the Treasury Stock Method Inclusion of Out-of-the-Money Share-Based Payment Awards With a Dilutive Effect Under the Treasury Stock Method Because of Tax Benefit Deficiencies Tax Benefit Component of Assumed Proceeds Realization of Excess Tax Benefits in the Calculation of the Tax Benefit Component of Assumed Proceeds 187 vii

8 Contents 6-23 Estimating Expected Disqualifying Dispositions in the Calculation of the Tax Benefit Component of Assumed Proceeds Impact of Early-Exercised Share-Based Payment Awards on Earnings per Share Impact of Employee Share Purchase Plans on Earnings per Share 189 Chapter 7 Employee Share Purchase Plans 190 Overview and Scope 190 Recognition Determining Whether an Employee Share Purchase Plan Is Noncompensatory Favorability of Terms Determining Whether an Employee Share Purchase Plan Is Noncompensatory Discount From the Market Price of an Entity s Shares Determining Whether an Employee Share Purchase Plan Is Noncompensatory Option Features Determining the Service Inception Date and Grant Date of an Employee Share Purchase Plan When There Is No Look-Back Feature Determining the Requisite Service Period of an Employee Share Purchase Plan 195 Measurement Accounting for Changes in Employee Withholdings in Connection With an Employee Share Purchase Plan Accounting for Forfeitures of an Employee Share Purchase Plan 198 Chapter 8 Income Taxes 199 Overview and Scope 200 Recognition Tax Effects of Share-Based Compensation Incentive Stock Options Nonqualified Stock Options Change in Tax Status of an Award Recharge Payments Made by Foreign Subsidiaries Impact of Research and Development Cost-Sharing Arrangements Interaction Between ASC 740 and Permanent Differences Related to an Exchange of Awards Accounting for Excess Tax Benefits Included in a Net Operating Loss Carryforward Acquired in a Business Combination Accounting for Income Taxes Related to Capitalized Share-Based Payment Compensation Cost 206 Initial Measurement Measuring Deferred Tax Assets in Reference to the Current Stock Price 208 Subsequent Measurement Basic Income Tax Effects of Share-Based Payment Awards Tax Effects of Awards With Graded Vesting Recognizing Income Tax Effects on an Award-by-Award Basis Income Tax Effects of Early Exercise of Awards Measuring the Excess Tax Benefit Associated With Share-Based Compensation: Tax Credits and Other Items That Affect the Effective Tax Rate Change in Tax Rates Amounts Included in the Excess Tax Benefits Available for Offset ( APIC Pool ) Realization of Excess Tax Benefits Tax Effects of Expiration of an Award Combining Employee and Nonemployee APIC Pools 216 viii

9 Contents 8-22 Effect of Acquisitions, Sales, Spin-Offs, and Investments in Equity Method Investees on the APIC Pool Parent-Company Awards Computing the APIC Pool Impact in Interim Financial Statements Interim Financial Statements Anticipating the Tax Effects of Share-Based Payment Awards Recording Tax Benefits of Awards Granted Before the Adoption of Statement 123(R) Effect on the APIC Pool When the Full Corresponding Deferred Tax Asset Does Not Exist Upon Exercise Valuation Allowances on Excess Tax Benefits Established Before the Adoption of Statement 123(R) Application of the Prospective Application Method to Nonpublic Entities APIC Pool Calculating the APIC Pool When a Company Becomes Public After Adopting Statement Presentation Balance Sheet Classification of Deferred Tax Assets Related to Nonqualified Stock Options Withholding Taxes for Dividends Paid to Shareholders 225 Chapter 9 Nonemployee Awards 227 Overview and Scope Definition of a Common Law Employee 231 Recognition In-Substance Nonrecourse Notes Accounting for Fully Vested, Nonforfeitable Share-Based Payment Awards Issued to Nonemployees 233 Initial Measurement Estimating the Expected Term of an Award in Valuing Options or Similar Instruments Issued to Nonemployees Performance Commitment Determination of a Sufficiently Large Disincentive for Nonperformance Nonpublic Entities Using Calculated Value to Determine the Value of Options or Similar Instruments Issued to Nonemployees Accounting for a Share-Based Payment Award Issued to a Nonemployee Before the Award s Measurement Date Measurement of a Liability-Classified Award Issued to a Nonemployee 239 Subsequent Measurement Accounting for the Modification of Share-Based Payment Awards Issued to Nonemployees Changes to Share-Based Payment Awards Issued to Nonemployees as a Result of Market Conditions Changes in the Quantity or Terms of a Nonemployee Share-Based Payment Award Because of the Achievement of Counterparty Performance Conditions Changes in the Quantity or Terms of a Nonemployee Share-Based Payment Award Because of the Achievement of Both Market Conditions and Counterparty Performance Conditions 243 Presentation and Disclosure Presentation of the Cost of Share-Based Payment Awards Issued to Nonemployees in the Statement of Operations Disclosure of Nonemployee Share-Based Payment Awards 246 Chapter 10 Business Combinations 247 Acquirer Share-Based Payment Awards Exchanged for Awards Held by the Acquiree s Employees Accounting for Share-Based Payment Awards Exchanged in a Business Combination Determining Whether an Acquirer Is Obligated to Replace the Acquiree s Employees Share-Based Payment Awards Accounting for the Exchange of Share-Based Payment Awards When the Acquirer Is Not Obligated to Replace the Acquiree s Share-Based Payment Awards Determining the Fair Value of Share-Based Payment Awards Exchanged in a Business Combination 250 ix

10 Contents Accounting for the Excess of the Fair-Value-Based Measure of the Replacement Share-Based Payment Awards Over That of the Replaced Share-Based Payment Awards Determining the Portions of the Replacement Share-Based Payment Award That Are Attributable to Precombination Service and Postcombination Service Determining the Total Service Period of Share-Based Payment Awards Exchanged in a Business Combination Accelerated Vesting of an Acquiree s Share-Based Payment Awards Upon a Change in Control Cash Settlement of an Acquiree s Share-Based Payment Awards Upon a Change in Control Accounting for Changes in Forfeiture Estimates Affecting Share-Based Payment Awards Exchanged in a Business Combination Accounting for a Change in Probability of Meeting a Performance Condition of Share-Based Payment Awards Exchanged in a Business Combination Replacement Awards With Graded Vesting Exchanged in a Business Combination Stay Bonus Arrangements Last-Man-Standing Awards Issued in a Business Combination Golden Parachute Arrangements 267 Income Tax Accounting for Replacement Awards Tax Benefits of Tax-Deductible Share-Based Payment Awards Exchanged in a Business Combination Tax Benefits Received From the Disqualifying Disposition of Incentive Stock Options Exchanged in a Business Combination 271 Chapter 11 Implementation Guidance 275 Guidance Applicable to Both Equity and Liability Awards 275 Implementation Guidance General 275 Fair Value Measurement Objectives and Application 276 Fair-Value-Based Instruments in a Share-Based Transaction 276 Valuation Techniques 277 Selecting Assumptions for Use in an Option Pricing Model 278 Calculated Value for Certain Nonpublic Entities 283 Market, Performance, and Service Conditions 284 Determination of Grant Date 288 Classification of Certain Awards with Repurchase Features 288 Identifying an Employee of a Physician Practice Management Entity 288 Illustrations Example 1: Estimating the Requisite Service Period 288 Example 2: Definition of Employee 289 Example 3: Share-Based Payment Award with a Performance Condition and Multiple Service Periods 289 Example 4: Share-Based Payment Award with a Service Condition and Multiple Service Periods 290 Example 5: Share-Based Payment Award with Market and Service Conditions and Multiple Service Periods 290 Example 6: Service Inception Date and Grant Date 291 Example 7: Tandem Awards 292 Example 8: Book Value Plans 294 Awards Classified as Equity 294 Implementation Guidance General 294 Equity Restructuring 294 Illustrations General 294 Example 1: Accounting for Share Options with Service Conditions 295 Example 2: Share Option Award Under Which the Number of Options to Be Earned Varies 300 Example 3: Share Option Award Under Which the Exercise Price Varies 301 x

11 Contents Example 4: Share Option Award with Other Performance Conditions 301 Example 5: Share Option with a Market Condition Indexed Exercise Price 302 Example 6: Share Unit with Performance and Market Conditions 303 Example 7: Share Option with Exercise Price that Increases by a Fixed Amount or Fixed Percentage 304 Example 8: Share Award Granted by a Nonpublic Entity 304 Example 9: Share Award Granted by a Nonpublic Entity that Uses the Calculated Value Method 305 Example 10: Share Award with a Clawback Feature 306 Example 11: Certain Noncompete Agreements and Requisite Service 307 Example 12: Modifications and Settlements 308 Example 13: Modifications Due to an Equity Restructuring 309 Example 14: Modifications of Awards with Performance and Service Vesting Conditions 310 Example 15: Illustration of a Type III Improbable to Probable Modification 313 Example 16: Modifications that Change an Award s Classification 313 Awards Classified as Liabilities 318 Illustrations Example 1: Cash-Settled Stock Appreciation Right 318 Example 2: Award Granted by a Nonpublic Entity that Elects the Intrinsic Value Method 319 Employee Share Purchase Plans 321 Implementation Guidance General 321 Variations on Basic Look-Back Plans 321 Illustrations Example 1: Look-Back Plans 322 Example 2: Limitations for Noncompensatory Treatment 327 Equity-Based Payments to Non-Employees 328 Illustrations General 328 Example 1: Identification of Situations in Which Performance Commitment Exists Before Performance Is Complete 328 Example 2: Identification of Situations in Which Performance Commitment Does Not Exist Before Performance Is Complete 329 Example 3: Arrangement Contains a Market Condition 330 Example 4: Accounting After the Performance Commitment Date Through Completion of Performance 330 Example 5: Accounting if There Is No Performance Commitment Until Completion of Performance 331 Awards Issued/Exchanged in a Business Combination 333 Implementation Guidance Acquirer Share-Based Payment Awards Exchanged for Awards Held by the Employees of the Acquiree 333 Illustrations Example 2: Acquirer Replacement Awards 334 Chapter 12 SEC Staff Guidance 336 SEC Staff Guidance Staff Accounting Bulletins 336 SAB Topic 14, Share-Based Payment 336 SAB Topic 14.A, Share-based Payment Transactions with Nonemployees 337 SAB Topic 14.B, Transition from Nonpublic to Public Entity Status 338 SAB Topic 14.C, Valuation Methods 339 SAB Topic 14.D, Certain Assumptions Used in Valuation Methods 340 SAB Topic 14.E, FASB ASC Topic 718, Compensation Stock Compensation, and Certain Redeemable Financial Instruments 347 SAB Topic 14.F, Classification of Compensation Expense Associated with Share-based Payment Arrangements 348 SAB Topic 14.I, Capitalization of Compensation Cost Associated with Share-Based Arrangements 348 Announcements Made by SEC Staff at EITF Meetings 349 SEC Staff Announcement: Escrowed Share Arrangements and the Presumption of Compensation 349 xi

12 Contents Announcements Made by SEC Staff at EITF Meetings 349 SEC Staff Announcement: Grantor Balance Sheet Presentation of Unvested, Forfeitable Equity Instruments Granted to a Nonemployee 349 Comments Made by SEC Observer at EITF Meetings 350 SEC Observer Comment: Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees 350 Appendix A Glossary of Topics, Standards, and Regulations 351 Appendix B Abbreviations 353 Appendix C Glossary of Terms 355 Appendix D Example Disclosure of Share-Based Payment Awards 364 Appendix E Sample SEC Comments: Share-Based Payment Awards 367 Appendix F Accounting for Share-Based Payment Awards Under IFRSs 372 xii

13 Preface To our friends and clients: We re pleased to present the third edition of. This Roadmap provides Deloitte s insights into and interpretations of the accounting guidance for share-based payment awards, primarily that in ASC and ASC The accounting framework for share-based payment awards has been in place for many years, however, views on the application of that framework to current transactions continues to evolve and requires significant judgment. Therefore, use of this Roadmap, though it is intended as a helpful resource, is not a substitute for consultation with Deloitte professionals on complex income tax accounting questions or transactions. The body of this Roadmap combines the share-based payment accounting rules from ASC 718 and ASC (along with relevant guidance from other topics such as ASC 740 and ASC 805) with Deloitte s interpretations and examples in a comprehensive, reader-friendly format. The Roadmap s organization mirrors the order of the codification and reflects ASUs issued through the end of December Each chapter of this publication typically starts with a brief introduction and includes excerpts from ASC (for employee awards) or ASC 505 (for nonemployee awards), Deloitte s interpretations of those excerpts, and examples to illustrate the relevant guidance. Where applicable, we also include cross-references linking to other Roadmap paragraphs (links are in blue; as a reminder, use [alt] and [left arrow] to return to the paragraph you were originally reading). In addition, this Roadmap includes six appendixes, including one on the accounting for share-based payment awards under IFRSs (Appendix F). We hope that you find this Roadmap a useful tool when considering the accounting guidance for share-based payment awards. Sincerely, Deloitte & Touche LLP 1 For the full titles of standards, topics, and regulations, see Appendix A. 2 Please note that this Roadmap does not cover the guidance in ASC on employee stock ownership plans. 1

14 Executive Summary The following is a brief summary of the Roadmap s 12 chapters and 6 appendixes: Chapter 1, Overview and Scope Includes excerpts from the overview and objectives section of ASC 718 and discusses the differences between awards within the scope of ASC 718 (i.e., share-based payments issued to employees) and those within the scope of other sections of the Codification (e.g., nonemployee awards). Chapter 2, Recognition Contains comprehensive recognition guidance on share-based payment awards issued to employees as well as guidance on determining whether to classify an award as a liability or equity. This chapter also discusses the determination of the grant date and how market, performance, and service conditions affect the recognition of compensation cost for share-based payment awards. Chapter 3, Initial Measurement Provides guidance on the amount at which an entity should measure the cost associated with an award (i.e., the award s fair-value-based measure) and explains how certain conditions affect the determination of this fair-value-based measure and the timing of measuring the cost associated with the award. Chapter 4, Subsequent Measurement Expands on many of the topics in the Initial Measurement chapter. This chapter focuses on measurement of compensation cost after the grant date of the award and includes extensive guidance on modifications of awards, changes in vesting conditions, changes in classification of an award, settlement/cancellation of awards, and equity restructuring. Chapter 5, Disclosure, and Chapter 6, Other Presentation Provide general guidance on disclosure and presentation matters related to the statement of financial position, income statement (including extensive earningsper-share guidance), statement of cash flows, and footnotes for share-based payment awards. Also see Appendix D, which contains a comprehensive disclosure example (discussed below). Chapter 7, Employee Share Purchase Plans Discusses background and scope considerations, the determination of whether the plan is compensatory or noncompensatory, the appropriate methods for compensation cost recognition, and measurement guidance specific to ESPPs. Chapter 8, Income Taxes Provides recognition, measurement, and presentation guidance on the income tax implications of share-based payment awards. Chapter 9, Nonemployee Awards Addresses scope, recognition, measurement, presentation, and disclosure guidance for awards granted to nonemployees. Chapter 10, Business Combinations Includes guidance for awards issued or exchanged in a business combination. Chapter 11, Implementation Guidance Includes excerpts from the implementation guidance in ASC 718, ASC 505, and ASC 805. Chapter 12, SEC Staff Guidance Includes excerpts from the SEC staff s guidance on share-based payment awards from various sections of the Codification, including ASC 718 and ASC 505. Appendix A Contains the full titles of topics, standards, and regulations used in the Roadmap. Appendix B Contains the full forms of acronyms used throughout the Roadmap. Appendix C Contains excerpts from the ASC 718 and ASC 505 glossaries of terms that are important to the accounting for share-based payment awards. Appendix D Includes a comprehensive example disclosure adapted from ASC

15 Appendix E Comprises a sample of recent SEC comments on share-based payment matters, which should be particularly useful for SEC registrants. Appendix F Contains a comprehensive discussion of the guidance on share-based payment awards under IFRSs. 3

16 Acknowledgments We are grateful for the contributions of Scott Cerutti, Sandie Kim, Tim Kolber, John Sarno, Aaron Shaw, Mark Strassler, Jiaojiao Tian, and Karen Wiltsie. In addition, we would like to acknowledge the contributions of Teri Asarito, Lynne Campbell, Geri Driscoll, Jeanine Pagliaro, Joseph Renouf, and Lora Spickler-Alot in our Production group. Rob Morris supervised the overall preparation of this Roadmap and extends his deepest appreciation to all professionals that helped in its development. 4

17 Chapter 1 Overview & Scope The scope of ASC 718 applies to all transactions in which an entity receives employee services in exchange for share-based instruments. The employees are in effect paying for the share-based instruments they receive with the services they are providing. Common examples of share-based payment awards include (1) employee share options, (2) share appreciation rights, (3) nonvested shares, and (4) nonvested share units. 1 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 the share-based instruments are not issued in exchange for employee services. See Q&A 1-03 for examples of additional share-based transactions, or aspects of those transactions, that are not within the scope of ASC 718. Share-based payment awards issued to nonemployees in exchange for goods or services are within the scope of ASC The recognition and measurement guidance on nonemployee share-based payment awards differs from that on accounting for employee awards under ASC 718. There are three potential differences: (1) the determination of the measurement date (the most significant difference), (2) the recognition of the cost of the award, and (3) the accounting for the award once performance is complete (i.e., determining whether the award is subject to other applicable GAAP). Because of these potential differences, it is important for an entity to consider whether the counterparty is an employee or nonemployee when accounting for share-based payment awards. See Chapter 9 for a discussion of awards granted to nonemployees, including a discussion of ASC and the related interpretive guidance. To be within the scope of ASC 718, share-based awards must, in addition to being issued in exchange for employee services, 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 Q&A 1-05). In this context, the word indexed indicates that the value the employee receives upon settlement of the award is, at least in part, determined by considering the value of the entity s equity. For instance, consider a cash-settled share appreciation right granted to an employee in which the award can only be settled in cash. In such circumstances, the amount of cash the employee 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. Consolidated Financial Statements Share-based payment awards granted to employees of entities within a consolidated group include, for example, awards that a parent grants to its subsidiary s employees and that are indexed to or settled in the parent s equity instruments. In the consolidated financial statements, as long as the individual receiving the award is deemed an employee of the consolidated group, awards indexed to or settled in the equity of any of the entities within the consolidated group are within the scope of ASC 718. Separate Financial Statements The accounting for share-based payment transactions in the separate financial statements of each entity within a consolidated group is a bit more difficult. Previously, the accounting for such transactions was discussed in Question 4 of Interpretation 44 and Issues 21 and 22 of EITF Issue Although Statement 123(R) (codified in ASC 718) subsequently superseded and nullified Interpretation 44 and Issue 00-23, entities should continue 1 Nonvested shares and nonvested share units are often referred to as restricted shares and restricted share units. See Q&A 3-24 for a discussion of the difference between a nonvested share and a restricted share. Because ASC 718 uses the term nonvested share, this Roadmap will also use the term nonvested share. 5

18 Chapter 1 Overview & Scope to analogize to their guidance on consolidated-group share-based payment transactions. See Q&A 1-08 through Q&A 1-10 for a discussion of the application of ASC 718 to the accounting in the separate financial statements of entities within a consolidated group. Other Economic Interest Holders The scope of ASC 718 also encompasses share-based payment awards that related parties or other economic interest holders in an entity issue to the entity s employees as compensation for employee services. However, transfers of equity instruments for purposes other than compensation for employee services are outside the scope of ASC 718. When such awards are issued in exchange for employee services, the transaction should be accounted for as a capital contribution from the related party or economic interest holder to the entity and as a grant of share-based payment awards by the entity to its employees. See ASC for additional discussion of awards issued to employees by related parties or other economic interest holders. Equity Method Investments Share-based payment awards that are issued to employees of an equity method investee and that are indexed to, or settled in, the equity of the investor are not within the scope of ASC 718. This conclusion is supported by analogy to paragraph 10 of Interpretation 44, which stated that APB Opinion 25 (also superseded by ASC 718) does not apply to the accounting by an investor of an unconsolidated investee for share-based payment awards that the investor grants to the investee s employees. An entity must therefore account for these awards under other guidance. Such guidance includes ASC through 25-5 and ASC , which address the accounting related to the financial statements of the equity method investor, the equity method investee, and the noncontributing investor(s). See Q&A 1-11 and Q&A 1-12 for additional guidance on accounting for these awards. Other Scope Matters It is not uncommon for entities to settle share-based payment awards issued to employees with shares of an unrelated entity. However, such transactions are not within the scope of ASC 718. The interpretive guidance below includes examples of such transactions and discusses how an entity should account for them under other GAAP (e.g., ASC 815). In addition, the scope of ASC 718 does not include awards that are issued as part of the consideration transferred in a business combination. Such awards are accounted for under ASC 805. See Chapter 10 for more information. ASC The Compensation Stock Compensation Topic provides guidance on share-based payment transactions with employees. This Topic includes the following Subtopics: a. Overall b. Awards Classified as Equity c. Awards Classified as Liabilities d. Employee Stock Ownership Plans e. Employee Stock Purchase Plans f. Income Taxes This Topic does not provide guidance for nonemployee share-based payment transactions. See Subtopic for guidance on nonemployee share transactions This Subtopic provides general guidance related to share-based payment arrangements with employees. This Subtopic and Subtopics and are interrelated and the required guidance may be located in either this Subtopic or one of the other Subtopics. In general, material that relates to both equity and liability instruments is included in this Subtopic, while material more specifically related to either equity or liability instruments is included in their respective Subtopics. 6

19 Chapter 1 Overview & Scope Objectives ASC The objective of accounting for transactions under share-based payment arrangements with employees is to recognize in the financial statements the employee services received in exchange for equity instruments issued or liabilities incurred and the related cost to the entity as those services are consumed. This Topic uses the terms compensation and payment in their broadest senses to refer to the consideration paid for employee services 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 with employees except for equity instruments held by employee stock ownership plans Definition of a Common Law Employee Question What are the criteria established by IRS Revenue Ruling 87-41, Employment Status Under Section 530(D) of the Revenue Act of 1978, that may aid in the assessment of whether an individual is an employee under common law? Answer The IRS developed the criteria (20 factors) on the basis of an examination of cases and rulings that determine whether an individual is an employee under common law. The degree of importance of each criterion varies depending on the factual context in which the services of an individual are performed. In addition, because the criteria are designed as guides in assisting in the determination of whether an individual is an employee, scrutiny is required in applying the criteria to assure that the substance of an arrangement is not obscured by an attempt to achieve a particular employment status. The criteria include the following: Instructions A worker who is required to comply with another person s instructions about when, where, and how he or she is to work is ordinarily an employee. In addition, the existence of instructions that involve the integration of a worker s services into the business operations generally demonstrates that the worker is subject to direction and control. 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. In addition, the worker s right to terminate the relationship or the employer s right to discharge the worker indicates an employer-employee relationship. 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 assistant 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. 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. Full time required 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. Payment Payment by the hour, week, or month generally points to an employer-employee relationship. In addition, if the person or persons for whom the services are performed ordinarily pay the worker s business expenses, traveling expenses, or both, the worker ordinarily is an employee. In addition to the foregoing general criteria, refer to IRS Revenue Ruling for additional factors that should be considered when assessing if an individual is an employee under common law. For a further discussion of the definition of an employee, refer to ASC

20 Chapter 1 Overview & Scope 1-02 Accounting Differences Between Employee and Nonemployee Share-Based Payment Awards Question Under ASC 505, what are the differences between the accounting for share-based payment awards granted to employees and the accounting for such awards issued to nonemployees? Answer The provisions of ASC 718 should be applied to all share-based payment awards granted to employees and also, when appropriate, to awards issued to nonemployees. SAB Topic 14.A states, in part: With respect to questions regarding nonemployee arrangements that are not specifically addressed in other authoritative literature, the staff believes that the application of guidance in Statement 123R [as codified in ASC 718] would generally result in relevant and reliable financial statement information. As such, the staff believes it would generally be appropriate for entities to apply the guidance in Statement 123R [as codified in ASC 718] by analogy to share-based payment transactions with nonemployees unless other authoritative accounting literature more clearly addresses the appropriate accounting, or the application of the guidance in Statement 123R [as codified in ASC 718] would be inconsistent with the terms of the instrument issued to a nonemployee in a sharebased payment arrangement. [Footnote omitted] Examples of the provisions of ASC 718 that apply equally to employee and nonemployee awards include, but are not limited to, the following: The accounting for modifications to the terms of previously issued awards. See Q&A 9-09 for a discussion of the accounting for the modification of share-based payment awards issued to nonemployees. The accounting for the income tax effects of awards in the statement of financial position, the statement of operations, and the statement of cash flows. However, one notable difference between the accounting for nonemployee awards and that for employee awards is related to the award s measurement date. Entities should refer to ASC to determine the measurement date for awards issued to nonemployees. ASC concludes that the measurement date of a nonemployee award is the earlier of (1) the performance commitment date or (2) the date on which the counterparty s performance is complete. ASC elaborates on the term performance commitment, stating, in part: A performance commitment is a commitment under which performance by the counterparty to earn the equity instruments is probable because of sufficiently large disincentives for nonperformance. The disincentives must result from the relationship between the issuer and the counterparty. Forfeiture of the equity instruments as the sole remedy in the event of the counterparty s nonperformance is not considered a sufficiently large disincentive for purposes of applying this guidance. The determination of whether a performance commitment contains a sufficiently large disincentive for nonperformance depends on the circumstances of the individual arrangement. See Q&A 9-05 for a discussion and example of what is considered a sufficiently large disincentive for nonperformance. In contrast, the date on which the counterparty s performance is complete represents the date when the entity receives and the counterparty has delivered or rendered the goods or services in exchange for the award. The measurement date for nonemployee awards is similar to the grant date for employee awards because the fair-value-based measure of the award is not fixed until that time. Furthermore, ASC indicates that if it is appropriate for the issuer to recognize some or all of the cost of the award under U.S. GAAP before the measurement date, the issuer would remeasure the award each reporting period at its fair-value-based measure. This is the same accounting as that for an employee award whose service inception date precedes the grant date. Lastly, while ASC does not specifically address either the period(s) or the manner (i.e., capitalize versus expense) in which cost associated with awards issued to nonemployees for goods or services must be recognized, it does state, in ASC , that entities are required to use the same period(s) and the same method they would use if the entity issuing the awards (issuer) had paid cash for the goods or services. 8