A comprehensive guide Share-based payment - EY

1 Financial reporting developments A comprehensive guide Share-based payment Revised October 2017 To our clients and other friends ASC Topic 718, Compensation Stock Compensation provides guidance on accounting for Share-based payment transactions with employees, and ASC Subtopic 505-50 provides guidance on accounting for nonemployee Share-based payment transactions. We have designed this publication as a resource to help you become familiar with the accounting for Share-based payments and assess the effect that Share-based payments may have on your company s financial statements. Section 1 provides a high-level overview of the accounting for Share-based payments . The remainder of this publication describes the accounting for Share-based payments in considerable detail. Throughout this publication, we have included the actual text from ASC 718 and other ASC topics (presented in shaded boxes), followed by our interpretations of that guidance (EY comments made within the guidance are included in bracketed text).

2 This edition has been updated to reflect ASU 2017-09, Scope of Modification Accounting, and our latest guidance on common practice issues. Although ASU 2017-09 is not effective as of the date of this publication, early adoption is permitted. We expect to continue to update this publication as additional questions and implementation issues arise. All income tax related topics, including the income tax accounting considerations of Share-based payments , are included in our publication on ASC 740, Income Taxes. Our accounting, tax, and people advisory services professionals are available to assist you in understanding and complying with the accounting requirements for Share-based payments and to help you consider the possible effect on your company s compensation strategy and plan design. October 2017 Financial reporting developments Share-based payment | i Contents 1 Overview .. 1 Background .. 1 Issuance of ASU 2016-09 .. 1 Issuance of ASU 2017-09 (added October 2017) .. 2 Scope.

3 2 The modified grant-date approach .. 2 Measurement of Share-based awards .. 4 Option 4 Considerations for nonpublic companies .. 5 Employee stock purchase plans .. 5 Recognition of compensation cost .. 5 Determining the requisite service 6 Estimating forfeitures before adopting ASU 6 Accounting for forfeitures after adopting ASU 2016-09 .. 7 Recognition of compensation cost awards with graded vesting .. 7 Modifications (updated October 2017) .. 7 Cash settlements .. 8 Liabilities .. 8 Classification .. 8 Measurement of liabilities public companies .. 9 Measurement of liabilities nonpublic companies .. 9 Income taxes .. 9 2 Scope .. 10 Transactions subject to ASC 718 .. 10 Issued in exchange for goods or services .. 10 based on or settled in the issuer s 10 Awards to employees and nonemployees (updated October 2017) .. 11 Employee stock ownership plans .. 11 Definition of employee .. 11 Definition of control .. 12 Part-time employees.

4 13 Leased employees and co-employment arrangements .. 13 Nonemployee directors .. 14 Directors of subsidiaries .. 15 Example stock options granted to nonemployee directors .. 15 Example awards granted to members of advisory board .. 16 Example large grants to nonemployee directors .. 16 Awards to employees of partnerships and similar entities .. 17 Certain transactions with related parties and other economic interest holders (updated October 2017) .. 18 Definition of economic interest .. 19 Contents Financial reporting developments Share-based payment | ii Definition of related parties .. 19 Awards granted between companies in a consolidated 19 Consolidated financial statements .. 20 Separate financial statements .. 20 Subsidiary Share-based payment awards granted to employees of another subsidiary in the consolidated group or employees of the parent .. 20 Awards granted to employees of an equity method investee (updated October 2017) .. 22 Accounting by the contributing investor.

5 22 Accounting by the investee .. 23 Accounting by the other investors .. 23 Awards by an employer based on another company s 23 Employee stock purchase plans (including look-back options) .. 24 Placing vesting requirements on previously issued shares ( , escrowed share arrangements) .. 24 Trusts related to employee benefits .. 24 Rabbi trusts (updated October 2017) .. 25 Other employee benefit trusts ( , flexitrusts, SECTs ) .. 26 Determining whether a company is public or nonpublic .. 27 Private equity investees .. 28 Subsidiaries of companies with equity securities traded on a foreign exchange .. 28 Transition from nonpublic to public status .. 28 3 Measurement of equity awards granted to employees .. 29 Objective .. 29 Measurement basis .. 29 Employee services received versus equity instruments issued .. 29 Fair-value- based measurement .. 30 If a company cannot reasonably estimate fair value .. 31 Exception for nonpublic entities that cannot estimate expected 32 Calculated value.

6 32 Change from calculated value to fair value .. 33 Measurement date .. 34 Definition of grant date .. 34 Mutual understanding of key terms and conditions .. 35 Practical accommodation regarding the concept of mutual understanding .. 35 Substantive terms of the plan .. 37 Employee begins to benefit from or be adversely affected by a change in the stock price .. 37 All necessary approvals must be obtained .. 38 Must meet the definition of an employee .. 39 Service inception date .. 40 Effect of service, performance, and market conditions on 40 Overview .. 40 Service conditions .. 41 Performance conditions .. 42 Definition .. 42 Requires the employee to render service .. 42 Contents Financial reporting developments Share-based payment | iii based on the operations or activities of the employer or activities of the employee .. 45 May be defined by reference to other groups or entities (updated October 2017) .. 45 Performance conditions that affect vesting (or exercisability) of an award.

7 46 Performance (or service) conditions that affect factors other than vesting or exercisability .. 47 Performance conditions to be established at a future date .. 49 Implied performance conditions (added October 2017) .. 49 Market conditions .. 49 Other conditions .. 50 Multiple conditions .. 50 Reload options and contingent features .. 51 Reload options .. 51 Contingent features .. 52 Dividend-protected awards .. 54 Dividend equivalents paid on equity instruments prior to vesting .. 54 Dividend equivalents paid on liability instruments .. 56 Dividend equivalents that reduce the exercise price .. 56 Implications of dividend equivalents on EPS .. 56 Nonrecourse notes .. 57 Recourse notes may be substantively nonrecourse .. 58 Early exercise of employee stock options and similar share purchases .. 59 Changes in employment status .. 60 Individual changes employment status and continues to vest under the original terms of the award .. 61 A nonemployee becomes an employee.

8 61 An employee becomes a nonemployee .. 62 An individual ceases to provide substantive service and continues to vest in an award .. 63 A modification is required for the individual to continue to vest in the award .. 64 Balance sheet presentation of equity awards .. 64 4 Recognition of compensation cost .. 65 Overview .. 65 Deferred compensation cost is not recognized .. 65 Compensation cost is recognized only if the requisite service is provided .. 66 Must estimate the number of instruments for which the requisite service will be provided before adopting ASU 2016-09 .. 66 Account for forfeitures as they occur or estimate forfeitures after adopting ASU 2016-09 .. 67 Compensation cost is capitalized in certain circumstances .. 68 Recognizing the change in fair value or intrinsic value for certain awards .. 69 Requisite service period .. 70 Definition of requisite service period and requisite service .. 70 Cannot immediately recognize cost of an award with a service condition.

9 71 Employment agreements and other arrangements should be considered when determining the requisite service period .. 71 Contents Financial reporting developments Share-based payment | iv Requisite service period for employee stock purchase plans .. 71 Service inception date .. 71 Service inception date may precede the grant date .. 71 No substantive service requirement subsequent to the grant date .. 72 Performance or market condition must be satisfied prior to the grant date .. 73 Bonuses settled partly or entirely in shares .. 74 Accounting for an award when the service inception date precedes the grant date .. 76 Service inception date cannot occur prior to obtaining all necessary approvals .. 77 Grant date may precede the service inception date .. 77 Effect of service, performance, and market conditions on recognition of compensation cost .. 77 Service conditions .. 78 Requisite service period generally is the explicit service period .. 79 Nonsubstantive service conditions ( , acceleration on retirement).

10 79 Nonsubstantive service periods due to retirement provisions .. 79 Noncompete arrangement as an in-substance service condition .. 80 Estimating forfeitures .. 84 Accounting for awards subject to graded vesting .. 85 Accounting for an award with graded vesting and all substantive terms are not known at the agreement date .. 86 comprehensive examples of the accounting for awards subject to service vesting .. 87 Performance conditions .. 103 Implicit service period .. 104 Compensation cost is recognized if it is probable that the performance condition will be achieved .. 104 Performance conditions based on IPOs, change in control and other liquidity events .. 105 Performance conditions based on regulatory approval (added October 2017) .. 105 Changes in estimate of the probability of achievement of the performance condition .. 106 Performance conditions that affect factors other than vesting or 107 Multiple performance conditions that affect the number of instruments that will vest.