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Accounting for Equity Compensation
by Barbara A. Baksa
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Format: Perfect-bound book, 166 pages
Edition: Thirteenth edition (March 2016)
Status: In stock
Chapter 2: Overview of the Standard
Chapter 3: Measurement Date
Chapter 4: Measurement of Expense
Chapter 5: Expense Attribution
Chapter 6: Accounting for Tax Effects
Chapter 7: Financing Exercise Transactions and Tax Withholding
Chapter 8: Modifications
Chapter 9: Business Combinations
Chapter 10: Earnings per Share
Chapter 11: Employee Stock Purchase Plans
Chapter 12: Stock Appreciation Rights
Chapter 13: Private Companies
Chapter 14: Disclosures
Chapter 15: Effective Date and Transition Methods
Chapter 16: Examples
From Chapter 1, "Introduction: How Did We Get Here?"In June 2015, the FASB issued an exposure draft proposing to amend ASC 718 to simplify the guidance applicable to share withholding, forfeitures, and accounting for tax effects. The specific areas of the standard that will be amended are discussed in further detail in the related sections of this book.
From Chapter 3, "Measurement Date"Shares that are subject to a repurchase obligation on the part of the company are subject to liability treatment when the repurchase provision (1) compels the company to deliver cash or other assets to employees in exchange for the shares and (2) enables employees to avoid bearing the risks and rewards associated with stock ownership (or if it is probable that the company would prevent employees from bearing these risks and rewards) for a reasonable period of time after the grant has vested and the underlying shares are issued. For this purpose, "a reasonable period" is considered to be six months; thus, where the repurchase will not occur for at least six months after the grant is vested and exercised, equity treatment will apply. A repurchase feature that is triggered only upon occurrence of an event outside the control of the employee (such as an IPO or a change in control) does not trigger liability treatment until the event becomes probable of occurring.
The standard makes an exception for repurchases that are solely for the purpose of financing tax payments due upon settlement of grant. Here, equity treatment continues to apply, provided that the number of shares repurchased is limited to the minimum necessary to fund the statutorily required tax payments. See chapter 7 for more information.
Liability treatment does not apply when shares are tendered to the company to cover the cost of stock (e.g., to pay for an option exercise) because the company issues its own equity, rather than cash or other assets, in exchange for the tendered shares.
Proposed Amendments to ASC 718: The FASB has proposed amending ASC 718 to align the treatment of repurchase provisions that are contingent on an event within the control of the employee (such as termination of employment) with repurchase provisions that are contingent upon events that are outside the employee's control (such as an IPO). If this amendment is adopted, repurchase provisions that are contingent upon any type of event would trigger liability treatment only to the extent that the event is probable of occurring.
From Chapter 5, "Expense Attribution"Under IFRS 2, where awards commence vesting before grant (e.g., in the case of awards to newly hired employees that commence vesting upon hire, even though the awards are not granted until sometime after the hire date), the service inception date may be viewed as occurring before the grant date. This triggers liability treatment until the grant date occurs (at which time the award would switch to equity treatment). Under ASC 718, however, this scenario typically has no impact beyond shortening the service period of the award.
For example, assume that an award is granted to an employee on May 1, 20X5, with a vesting commencement date of February 1, 20X5, and is scheduled to vest in full one year after the vesting commencement date.
Under ASC 718, this results in a service period of nine months (from the grant date on May 1, 20X5, to the vest date on February 1, 20X6). Expense is recognized evenly over this nine-month period. Assuming an aggregate expense of $9,000 (inclusive of any adjustment for estimated forfeitures), the company would recognize expense of $1,000 per month. No expense is recognized before the grant date.
Under IFRS 2, however, it may be necessary to recognize expense during the three months that elapse between the vesting commencement date on February 1, 20X5, and the grant date on May 1, 20X5. Because the grant date has not occurred yet, the award would be subject to liability treatment for this period.