Scope
The share-based payment guidance in ASC 718 applies to all entities that enter share-based payment transactions. Regardless of its legal form, an award is in the scope of ASC 718 if it is either settled in the entity’s stock or based at least partially on its value. However, ASC 718 excludes specific transactions.
Measurement
An entity that grants share-based payment awards generally must recognize the cost of the awards using a fair-value-based measure at the measurement date, which depends on the award’s classification.
- For equity-classified awards, the measurement date is the grant date.
- For liability-classified awards, an entity initially measures an award at the grant-date fair value but subsequently remeasures it at fair value at the end of each reporting period until the award is settled.
Classification
The accounting for a share-based payment award differs depending on whether it is classified as equity or as a liability.
- An award is typically equity-classified if its terms result in settlement of the award in the entity’s stock.
- An award is typically liability-classified if its terms result in settlement of the award in cash or other assets.
Recognition
An entity generally recognizes the fair value of a share-based payment award as compensation cost in the period in which the entity consumes the benefits of a grantee’s performance. That is, cost is recognized:
- For goods, when they are obtained.
- For services, as they are received (generally as an expense, unless capitalizable in accordance with other U.S. GAAP).
An entity must also identify other terms and conditions of the award that affect the accounting, including:
- Time or service-based vesting conditions
- Performance-based conditions (for example, meeting a revenue or EBITDA threshold)
- Market-based conditions (for example, meeting a specified price of the entity’s shares)
- Other terms and conditions, such as repurchase features
Modifications
An entity may change the terms or conditions of an existing share-based payment award. An entity must account for the modification if it affects the award’s classification, vesting, or fair value. The cancellation of an award and contemporaneous grant of a new award may also be required to be accounted for as a modification.
Nonemployee Awards
While ASC 718 substantially aligns the accounting for share-based payment awards issued to employees and nonemployees, some differences remain, primarily regarding some aspects of measurement and cost attribution.
Presentation and Disclosure
ASC 718 provides limited guidance on the presentation of share-based payment awards.
- Balance sheet classification depends on an award’s accounting classification as a liability or equity.
- Compensation cost is presented as an expense in the income statement unless other authoritative guidance requires it to be capitalized.
- Because a share-based payment award represents a non-cash transaction, an entity that presents the cash flow statement using the indirect method adjusts net income for the compensation cost in reconciling net income to net cash flow from operating activities.
In addition, an entity must apply ASC 260, Earnings Per Share, to determine the effect of a share-based payment award. ASC 718 requires disclosures for awards granted to both employees and nonemployees.
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