# ASC 718-10-55: Compensation—Stock Compensation — Overall — 55 Implementation Guidance and Illustrations Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/718/10/#55-implementation-guidance-and-illustrations) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:a91479ba6fd7b658f3be78cd765cf7a82e187fb1da2e2bf73412ab522fd23889 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 718-10-55: 55 Implementation Guidance and Illustrations [Read section](https://asc.understandingaccounting.org/asc/718/10/#55-implementation-guidance-and-illustrations) SEC content: no #### Implementation Guidance ##### [718-10-55-1](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:0af7f91a3f7a4248aa16ab06a3789ea22ded98a66d0c9bf3e8832b9c90b8c98a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic and Subtopics 718-20 and 718-30 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. ##### [718-10-55-2](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:6c3dce8754a72624896f4be4f41a1f9d034d53748bfb12f3f7e9c738c92544c8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Implementation guidance is provided on the following matters: 1. a [Fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.") measurement objectives and application 2. b Fair-value-based instruments in a share-based transaction 3. c Valuation techniques 4. d Selecting assumptions for use in an option pricing model 1. 1 Consistent use of valuation techniques and methods for selecting assumptions 2. 2 Selecting or estimating the risk-free rate for the expected term 3. 3 Selecting or estimating the expected term 4. 4 Selecting or estimating the expected [volatility](https://asc.understandingaccounting.org/glossary/v/#volatility "A measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. Volatility also may be defined as a probability-weighted measure of the dispersion of returns about the mean. The volatility of a share price is the standard deviation of the continuously compounded rates of return on the share over a specified period. That is the same as the standard deviation of the differences in the natural logarithms of the stock prices plus dividends, if any, over the period. The higher the volatility, the more the returns on the shares can be expected to vary—up or down. Volatility is typically expressed in annualized terms.") 5. 5 Selecting or estimating expected dividends 6. 6 Dividend protected awards 7. 7 Selecting or considering credit risk 8. 8 Contingency features that affect the option pricing model 9. 9 Consider dilution. 5. dd Nonpublic entity—practical expedient for expected term 6. e [Calculated value](https://asc.understandingaccounting.org/glossary/c/#calculated-value "A measure of the value of a share option or similar instrument determined by substituting the historical volatility of an appropriate industry sector index for the expected volatility of a nonpublic entity's share price in an option-pricing model.") for certain nonpublic entities 7. f [Market](https://asc.understandingaccounting.org/glossary/m/#market-condition "A condition affecting the exercise price, exercisability, or other pertinent factors used in determining the fair value of an award under a share-based payment arrangement that relates to the achievement of either of the following: A specified price of the issuer's shares or a specified amount of intrinsic value indexed solely to the issuer's shares A specified price of the issuer's shares in terms of a similar (or index of similar) equity security (securities). The term similar as used in this definition refers to an equity security of another entity that has the same type of residual rights. For example, common stock of one entity generally would be similar to the common stock of another entity for this purpose."), [performance](https://asc.understandingaccounting.org/glossary/p/#performance-condition "A condition affecting the vesting, exercisability, exercise price, or other pertinent factors used in determining the fair value of an award that relates to both of the following: Rendering service or delivering goods for a specified (either explicitly or implicitly) period of time Achieving a specified performance target that is defined solely by reference to the grantor's own operations (or activities) or by reference to the grantee's performance related to the grantor's own operations (or activities).Attaining a specified growth rate in return on assets, obtaining regulatory approval to market a specified product, selling shares in an initial public offering or other financing event, and a change in control are examples of performance conditions. A performance target also may be defined by reference to the same performance measure of another entity or group of entities. For example, attaining a growth rate in earnings per share (EPS) that exceeds the average growth rate in EPS of other entities in the same industry is a performance condition. A performance target might pertain to the performance of the entity as a whole or to some part of the entity, such as a division, or to the performance of the grantee if such performance is in accordance with the terms of the award and solely relates to the grantor's own operations (or activities).(P) December 16, 2026; (N) December 16, 2026606-10-65-2For share-based payments in which a grantor acquires goods or services to be used or consumed in the grantor’s own operations, a condition affecting the vesting, exercisability, exercise price, or other pertinent factors used in determining the fair value of an award that relates to both of the following: Rendering service or delivering goods for a specified (either explicitly or implicitly) period of time Achieving a specified performance target that is defined solely by reference to the grantor's own operations (or activities) or by reference to the grantee's performance related to the grantor's own operations (or activities).Attaining a specified growth rate in return on assets, obtaining regulatory approval to market a specified product, selling shares in an initial public offering or other financing event, and a change in control are examples of performance conditions. A performance target also may be defined by reference to the same performance measure of another entity or group of entities. For example, attaining a growth rate in earnings per share (EPS) that exceeds the average growth rate in EPS of other entities in the same industry is a performance condition. A performance target might pertain to the performance of the entity as a whole or to some part of the entity, such as a division, or to the performance of the grantee if such performance is in accordance with the terms of the award and solely relates to the grantor's own operations (or activities).For share-based consideration payable to a customer that can result in a reduction of the transaction price in accordance with Topic 606, a condition affecting the vesting, exercisability, exercise price, or other pertinent factors used in determining the fair value of an award that relates to any of the following:Achieving a specified performance target that is defined solely by reference to the grantor’s own operations (or activities) or by reference to the grantee’s (the customer’s) performance related to the grantor’s own operations (or activities)The grantee’s purchase (or potential purchase) of the grantor’s goods or services from either the grantor or the grantor’s customersA purchase (or potential purchase) of the grantor’s goods or services from either the grantee or the grantee’s customers.The performance targets listed in this definition for employee and nonemployee awards (for example, a change in control) are also examples of performance conditions for share-based consideration payable to a customer."), and [service conditions](https://asc.understandingaccounting.org/glossary/s/#service-condition "A condition affecting the vesting, exercisability, exercise price, or other pertinent factors used in determining the fair value of an award that depends solely on an employee rendering service to the employer for the requisite service period or a nonemployee delivering goods or rendering services to the grantor over a vesting period. A condition that results in the acceleration of vesting in the event of a grantee's death, disability, or termination without cause is a service condition.") 1. 1 Market, performance, and service conditions that affect vesting and exercisability 2. 2 Market, performance, and service conditions that affect factors other than vesting and exercisability 3. 3 Estimating the employee's [requisite service period](https://asc.understandingaccounting.org/glossary/r/#requisite-service-period "The period or periods during which an employee is required to provide service in exchange for an award under a share-based payment arrangement. The service that an employee is required to render during that period is referred to as the requisite service. The requisite service period for an award that has only a service condition is presumed to be the vesting period, unless there is clear evidence to the contrary. If an award requires future service for vesting, the entity cannot define a prior period as the requisite service period. Requisite service periods may be explicit, implicit, or derived, depending on the terms of the share-based payment award.") 4. 4 Explicit, implicit, and derived employee's requisite service periods. 8. g Determination of [grant date](https://asc.understandingaccounting.org/glossary/g/#grant-date "The date at which a grantor and a grantee reach a mutual understanding of the key terms and conditions of a share-based payment award. The grantor becomes contingently obligated on the grant date to issue equity instruments or transfer assets to a grantee who delivers goods or renders services or purchases goods or services as a customer. Awards made under an arrangement that is subject to shareholder approval are not deemed to be granted until that approval is obtained unless approval is essentially a formality (or perfunctory), for example, if management and the members of the board of directors control enough votes to approve the arrangement. Similarly, individual awards that are subject to approval by the board of directors, management, or both are not deemed to be granted until all such approvals are obtained. The grant date for an award of equity instruments is the date that a grantee begins to benefit from, or be adversely affected by, subsequent changes in the price of the grantor's equity shares. Paragraph 718-10-25-5 provides guidance on determining the grant date. See Service Inception Date.") 9. h [Service inception date](https://asc.understandingaccounting.org/glossary/s/#service-inception-date "The date at which the employee's requisite service period or the nonemployee's vesting period begins. The service inception date usually is the grant date, but the service inception date may differ from the grant date (see Example 6 [see paragraph 718-10-55-107] for an illustration of the application of this term to an employee award).") and grant date 10. i [Equity restructuring](https://asc.understandingaccounting.org/glossary/e/#equity-restructuring "A nonreciprocal transaction between an entity and its shareholders that causes the per-share fair value of the shares underlying an option or similar award to change, such as a stock dividend, stock split, spinoff, rights offering, or recapitalization through a large, nonrecurring cash dividend.") 11. j Classification of certain awards with repurchase features 12. k Employee of a physician practice. ##### [718-10-55-3](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:1183421b83ac5ecfa00bdafb0a11d3fe13495a0780b4d04ecf6fca5c6cb96e65 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Section fair value also applies to nonpublic entities that use the calculated value method pursuant to paragraph [718-10-30-20](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-20). ##### [718-10-55-4](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:4498651be3989c60966f014a0328599977e06743f044423846f5b4e317a1b4e1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The measurement objective for equity instruments granted in [share-based payment transactions](https://asc.understandingaccounting.org/glossary/s/#share-based-payment-transactions "A transaction under a share-based payment arrangement, including a transaction in which an entity acquires goods or services because related parties or other holders of economic interests in that entity awards a share-based payment to an employee or other supplier of goods or services for the entity's benefit. Also called share-based compensation transactions.") is to estimate the grant-date fair value of the equity instruments that the entity is obligated to issue when grantees have delivered the good or have rendered the service and satisfied any other conditions necessary to earn the right to benefit from the instruments. That estimate is based on the share price and other pertinent factors (including those enumerated in paragraphs [718-10-55-21 through 55-22](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-21) , if applicable) at the grant date and is not remeasured in subsequent periods under the fair-value-based method. ##### [718-10-55-5](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:d4ccb50c13428ff2edf3dccf81d8d848d7277e8d57c14545ccac50b61ba4c70e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A [restriction](https://asc.understandingaccounting.org/glossary/r/#restriction "A contractual or governmental provision that prohibits sale (or substantive sale by using derivatives or other means to effectively terminate the risk of future changes in the share price) of an equity instrument for a specified period of time.") that continues in effect after the entity has issued instruments to grantees, such as the inability to transfer vested equity share options to third parties or the inability to sell vested shares for a period of time, is considered in estimating the fair value of the instruments at the grant date. For instance, if shares are traded in an active market, postvesting restrictions may have little, if any, effect on the amount at which the shares being valued would be exchanged. For share options and similar instruments, the effect of nontransferability (and nonhedgeability, which has a similar effect) is taken into account by reflecting the effects of grantees' expected exercise and postvesting termination behavior in estimating fair value (referred to as an option's expected term). ##### [718-10-55-6](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:4f0a8693e3dee14c8ee3e63bbc56ff7910d44dd2b945226b47374b5bf1f7f592 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In contrast, a restriction that stems from the forfeitability of instruments to which grantees have not yet earned the right, such as the inability either to exercise a nonvested equity [share option](https://asc.understandingaccounting.org/glossary/s/#share-option "A contract that gives the holder the right, but not the obligation, either to purchase (to call) or to sell (to put) a certain number of shares at a predetermined price for a specified period of time.") or to sell [nonvested shares](https://asc.understandingaccounting.org/glossary/n/#nonvested-shares "Shares that an entity has not yet issued because the agreed-upon consideration, such as the delivery of specified goods or services and any other conditions necessary to earn the right to benefit from the instruments, has not yet been satisfied. Nonvested shares cannot be sold. The restriction on sale of nonvested shares is due to the forfeitability of the shares if specified events occur (or do not occur)."), is not reflected in the fair value of the instruments at the grant date. Instead, those restrictions are taken into account by recognizing compensation cost only for awards for which grantees deliver the goods or render the service. ##### [718-10-55-7](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:ee67827ac87a888311279882e549ed00c75693173222711770739561431ff213 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Note that performance and service conditions are vesting conditions for purposes of this Topic. Market conditions are not vesting conditions for purposes of this Topic but market conditions may affect exercisability of an [award](https://asc.understandingaccounting.org/glossary/a/#award "The collective noun for multiple instruments with the same terms and conditions granted at the same time either to a single grantee or to a group of grantees. An award may specify multiple vesting dates, referred to as graded vesting, and different parts of an award may have different expected terms. References to an award also apply to a portion of an award."). Market conditions are included in the estimate of the grant-date fair value of awards (see paragraphs [718-10-55-64 through 55-66](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-64) ). ##### [718-10-55-8](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:49c474fec62551816674bcdc147dc49f0d140252ab8873733610892df39b7fc0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Reload features](https://asc.understandingaccounting.org/glossary/r/#reload-feature-and-reload-option "A reload feature provides for automatic grants of additional options whenever a grantee exercises previously granted options using the entity's shares, rather than cash, to satisfy the exercise price. At the time of exercise using shares, the grantee is automatically granted a new option, called a reload option, for the shares used to exercise the previous option.") and contingent features that require a grantee to transfer equity shares earned, or realized gains from the sale of equity instruments earned, to the issuing entity for consideration that is less than fair value on the date of transfer (including no consideration), such as a clawback feature, shall not be reflected in the grant-date fair value of an equity award. Those features are accounted for if and when a reload grant or contingent event occurs. A clawback feature can take various forms but often functions as a noncompete mechanism. For example, an employee that terminates the employment relationship and begins to work for a competitor is required to transfer to the issuing entity (former employer) equity shares granted and earned in a share-based payment transaction. ##### [718-10-55-9](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:8e6dc407a99de8eacc51323646d89ccefd4b4dc23b9cce4de3daad44c8b86a47 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The fair value measurement objective for liabilities incurred in a share-based payment transaction is the same as for equity instruments. However, awards classified as liabilities are subsequently remeasured to their fair values (or a portion thereof until the promised good has been delivered or the service has been rendered) at the end of each reporting period until the liability is [settled](https://asc.understandingaccounting.org/glossary/s/#settlement-of-an-award "An action or event that irrevocably extinguishes the issuing entity's obligation under a share-based payment award. Transactions and events that constitute settlements include the following: Exercise of a share option or lapse of an option at the end of its contractual term Vesting of shares Forfeiture of shares or share options due to failure to satisfy a vesting condition An entity's repurchase of instruments in exchange for assets or for fully vested and transferable equity instruments. The vesting of a share option is not a settlement because the entity remains obligated to issue shares upon exercise of the option."). ##### [718-10-55-10](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:f86addc6b6dbaa1e1e5ca64388ef16ece639f32e159cf73716e83b8f2ebf9982 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The definition of fair value refers explicitly only to assets and liabilities, but the concept of value in a current exchange embodied in it applies equally to the equity instruments subject to this Topic. Observable market prices of identical or similar equity or liability instruments in active markets are the best evidence of fair value and, if available, shall be used as the basis for the measurement of equity and liability instruments awarded in a share-based payment transaction. Determining whether an equity or liability instrument is similar is a matter of judgment, based on an analysis of the terms of the instrument and other relevant facts and circumstances. For example, awards to grantees of a [public entity](https://asc.understandingaccounting.org/glossary/p/#public-entity "An entity that meets any of the following criteria: 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 Makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market 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.") of shares of its common stock, subject only to a service or [performance condition](https://asc.understandingaccounting.org/glossary/p/#performance-condition "A condition affecting the vesting, exercisability, exercise price, or other pertinent factors used in determining the fair value of an award that relates to both of the following: Rendering service or delivering goods for a specified (either explicitly or implicitly) period of time Achieving a specified performance target that is defined solely by reference to the grantor's own operations (or activities) or by reference to the grantee's performance related to the grantor's own operations (or activities).Attaining a specified growth rate in return on assets, obtaining regulatory approval to market a specified product, selling shares in an initial public offering or other financing event, and a change in control are examples of performance conditions. A performance target also may be defined by reference to the same performance measure of another entity or group of entities. For example, attaining a growth rate in earnings per share (EPS) that exceeds the average growth rate in EPS of other entities in the same industry is a performance condition. A performance target might pertain to the performance of the entity as a whole or to some part of the entity, such as a division, or to the performance of the grantee if such performance is in accordance with the terms of the award and solely relates to the grantor's own operations (or activities).(P) December 16, 2026; (N) December 16, 2026606-10-65-2For share-based payments in which a grantor acquires goods or services to be used or consumed in the grantor’s own operations, a condition affecting the vesting, exercisability, exercise price, or other pertinent factors used in determining the fair value of an award that relates to both of the following: Rendering service or delivering goods for a specified (either explicitly or implicitly) period of time Achieving a specified performance target that is defined solely by reference to the grantor's own operations (or activities) or by reference to the grantee's performance related to the grantor's own operations (or activities).Attaining a specified growth rate in return on assets, obtaining regulatory approval to market a specified product, selling shares in an initial public offering or other financing event, and a change in control are examples of performance conditions. A performance target also may be defined by reference to the same performance measure of another entity or group of entities. For example, attaining a growth rate in earnings per share (EPS) that exceeds the average growth rate in EPS of other entities in the same industry is a performance condition. A performance target might pertain to the performance of the entity as a whole or to some part of the entity, such as a division, or to the performance of the grantee if such performance is in accordance with the terms of the award and solely relates to the grantor's own operations (or activities).For share-based consideration payable to a customer that can result in a reduction of the transaction price in accordance with Topic 606, a condition affecting the vesting, exercisability, exercise price, or other pertinent factors used in determining the fair value of an award that relates to any of the following:Achieving a specified performance target that is defined solely by reference to the grantor’s own operations (or activities) or by reference to the grantee’s (the customer’s) performance related to the grantor’s own operations (or activities)The grantee’s purchase (or potential purchase) of the grantor’s goods or services from either the grantor or the grantor’s customersA purchase (or potential purchase) of the grantor’s goods or services from either the grantee or the grantee’s customers.The performance targets listed in this definition for employee and nonemployee awards (for example, a change in control) are also examples of performance conditions for share-based consideration payable to a customer.") for vesting (nonvested shares), shall be measured based on the market price of otherwise identical (that is, identical except for the vesting condition) common stock at the grant date. ##### [718-10-55-11](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:a1f1133c428a2122b33ad5892b3fdb801bd088ebcd06e25fd3d5b4b62fff0c09 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If observable market prices of identical or similar equity or liability instruments of the entity are not available, the fair value of equity and liability instruments awarded to grantees shall be estimated by using a valuation technique that meets all of the following criteria: 1. a It is applied in a manner consistent with the fair value measurement objective and the other requirements of this Topic. 2. b It is based on established principles of financial economic theory and generally applied in that field (see paragraph [718-10-55-16](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-16)). Established principles of financial economic theory represent fundamental propositions that form the basis of modern corporate finance (for example, the [time value](https://asc.understandingaccounting.org/glossary/t/#time-value "The portion of the fair value of an option that exceeds its intrinsic value. For example, a call option with an exercise price of $20 on a stock whose current market price is $25 has intrinsic value of $5. If the fair value of that option is $7, the time value of the option is $2 ($7 - $5).") of money and risk-neutral valuation). 3. c It reflects all substantive characteristics of the instrument (except for those explicitly excluded by this Topic, such as vesting conditions and reload features). That is, the fair values of equity and liability instruments granted in a share-based payment transaction shall be estimated by applying a valuation technique that would be used in determining an amount at which instruments with the same characteristics (except for those explicitly excluded by this Topic) would be exchanged. ##### [718-10-55-12](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:a0eeb290ddf905cb98cf7974163a6a35e868719fb77c26fffee51d9c7e5e28fa Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An estimate of the amount at which instruments similar to share options and other instruments granted in share-based payment transactions would be exchanged would factor in expectations of the probability that the good would be delivered or the service would be rendered and the instruments would [vest](https://asc.understandingaccounting.org/glossary/v/#vest "To earn the rights to. A share-based payment award becomes vested at the date that the grantee's right to receive or retain shares, other instruments, or cash under the award is no longer contingent on satisfaction of either a service condition or a performance condition. Market conditions are not vesting conditions. The stated vesting provisions of an award often establish the employee's requisite service period or the nonemployee's vesting period, and an award that has reached the end of the applicable period is vested. However, as indicated in the definition of requisite service period and equally applicable to a nonemployee's vesting period, the stated vesting period may differ from those periods in certain circumstances. Thus, the more precise terms would be options, shares, or awards for which the requisite good has been delivered or service has been rendered and the end of the employee's requisite service period or the nonemployee's vesting period.") (that is, that the performance or service conditions would be satisfied). However, as noted in paragraph [718-10-55-4](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-4), the measurement objective in this Topic is to estimate the fair value at the grant date of the equity instruments that the entity is obligated to issue when grantees have delivered the good or rendered the service and satisfied any other conditions necessary to earn the right to benefit from the instruments. Therefore, the estimated fair value of the instruments at grant date does not take into account the effect on fair value of vesting conditions and other restrictions that apply only during the employee's requisite service period or the nonemployee's vesting period. Under the fair-value-based method required by this Topic, the effect of vesting conditions and other restrictions that apply only during the employee's requisite service period or the nonemployee's vesting period is reflected by recognizing compensation cost only for instruments for which the good is delivered or the service is rendered. ##### [718-10-55-13](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:4b2e8bda3153d82ad7e9296151ef2c204eab495b9fc5581dc41995e9efb58a4a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In applying a valuation technique, the assumptions used shall be consistent with the fair value measurement objective. That is, assumptions shall reflect information that is (or would be) available to form the basis for an amount at which the instruments being valued would be exchanged. In estimating fair value, the assumptions used shall not represent the biases of a particular party. Some of those assumptions will be based on or determined from external data. Other assumptions, such as the employees' expected exercise behavior, may be derived from the entity's own historical experience with [share-based payment arrangements](https://asc.understandingaccounting.org/glossary/s/#share-based-payment-arrangements "An arrangement under which either of the following conditions is met: One or more suppliers of goods or services (including employees) receive awards of equity shares, equity share options, or other equity instruments. The entity incurs liabilities to suppliers that meet either of the following conditions: 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 may be indexed to both the price of the entity's shares and something other than either the price of the entity's shares or a market, performance, or service condition.) The awards require or may require settlement by issuance of the entity's shares. The term shares 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. Also called share-based compensation arrangements."). ##### [718-10-55-14](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:e664e60293fc610afececc8fff5c7e7e29fcc8279778a4d3b5333d6c874fa3e7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The fair value of any equity or liability instrument depends on its substantive characteristics. Paragraphs [718-10-55-21 through 55-22](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-21) list the minimum set of substantive characteristics of instruments with option (or option-like) features that shall be considered in estimating those instruments' fair value. However, a share-based payment award could contain other characteristics, such as a [market condition](https://asc.understandingaccounting.org/glossary/m/#market-condition "A condition affecting the exercise price, exercisability, or other pertinent factors used in determining the fair value of an award under a share-based payment arrangement that relates to the achievement of either of the following: A specified price of the issuer's shares or a specified amount of intrinsic value indexed solely to the issuer's shares A specified price of the issuer's shares in terms of a similar (or index of similar) equity security (securities). The term similar as used in this definition refers to an equity security of another entity that has the same type of residual rights. For example, common stock of one entity generally would be similar to the common stock of another entity for this purpose."), that should be included in a fair value estimate. Judgment is required to identify an award's substantive characteristics and, as described in paragraphs [718-10-55-15 through 55-20](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-15) , to select a valuation technique that incorporates those characteristics. ##### [718-10-55-15](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-15) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:95bf3d42138240f34d24d20cd7d554b838fc8b995e4b8f65e6a18846b7dfcb76 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Valuation techniques used for share options and similar instruments granted in share-based payment transactions estimate the fair value of those instruments at a single point in time (for example, at the grant date). The assumptions used in a fair value measurement are based on expectations at the time the measurement is made, and those expectations reflect the information that is available at the time of measurement. The fair value of those instruments will change over time as factors used in estimating their fair value subsequently change, for instance, as share prices fluctuate, risk-free interest rates change, or dividend streams are modified. Changes in the fair value of those instruments are a normal economic process to which any valuable resource is subject and do not indicate that the expectations on which previous fair value measurements were based were incorrect. The fair value of those instruments at a single point in time is not a forecast of what the estimated fair value of those instruments may be in the future. ##### [718-10-55-16](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-16) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:5900afc02ab520e7dcd6df51557faf308231142a3d31062dc6009b08e7c0f1e0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A [lattice model](https://asc.understandingaccounting.org/glossary/l/#lattice-model "A model that produces an estimated fair value based on the assumed changes in prices of a financial instrument over successive periods of time. The binomial model is an example of a lattice model. In each time period, the model assumes that at least two price movements are possible. The lattice represents the evolution of the value of either a financial instrument or a market variable for the purpose of valuing a financial instrument. In this context, a lattice model is based on risk-neutral valuation and a contingent claims framework. See Closed-Form Model for an explanation of the terms risk-neutral valuation and contingent claims framework.") (for example, a binomial model) and a [closed-form model](https://asc.understandingaccounting.org/glossary/c/#closed-form-model "A valuation model that uses an equation to produce an estimated fair value. The Black-Scholes-Merton formula is a closed-form model. In the context of option valuation, both closed-form models and lattice models are based on risk-neutral valuation and a contingent claims framework. The payoff of a contingent claim, and thus its value, depends on the value(s) of one or more other assets. The contingent claims framework is a valuation methodology that explicitly recognizes that dependency and values the contingent claim as a function of the value of the underlying asset(s). One application of that methodology is risk-neutral valuation in which the contingent claim can be replicated by a combination of the underlying asset and a risk-free bond. If that replication is possible, the value of the contingent claim can be determined without estimating the expected returns on the underlying asset. The Black-Scholes-Merton formula is a special case of that replication.") (for example, the Black-Scholes-Merton formula) are among the valuation techniques that meet the criteria required by this Topic for estimating the fair values of share options and similar instruments granted in share-based payment transactions. A Monte Carlo simulation technique is another type of valuation technique that satisfies the requirements in paragraph [718-10-55-11](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-11). Other valuation techniques not mentioned in this Topic also may satisfy the requirements in that paragraph. Those valuation techniques or models, sometimes referred to as option-pricing models, are based on established principles of financial economic theory. Those techniques are used by valuation professionals, dealers of derivative instruments, and others to estimate the fair values of options and similar instruments related to equity securities, currencies, interest rates, and commodities. Those techniques are used to establish trade prices for derivative instruments and to establish values in adjudications. As discussed in paragraphs [718-10-55-21 through 55-50](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-21) , both lattice models and closed-form models can be adjusted to account for the substantive characteristics of share options and similar instruments granted granted in share-based payment transactions. ##### [718-10-55-17](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-17) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:ccb715b3343beb9ee7dde83985b8ffdf1a9258da772e7a21d2e7ff356a428cad Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Topic does not specify a preference for a particular valuation technique or model in estimating the fair values of share options and similar instruments granted in share-based payment transactions. Rather, this Topic requires the use of a valuation technique or model that meets the measurement objective in paragraph [718-10-30-6](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-6) and the requirements in paragraph [718-10-55-11](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-11). The selection of an appropriate valuation technique or model will depend on the substantive characteristics of the instrument being valued. Because an entity may grant different types of instruments, each with its own unique set of substantive characteristics, an entity may use a different valuation technique for each different type of instrument. The appropriate valuation technique or model selected to estimate the fair value of an instrument with a market condition must take into account the effect of that market condition. The designs of some techniques and models better reflect the substantive characteristics of a particular share option or similar instrument granted in share-based payment transactions. Paragraphs [718-10-55-18 through 55-20](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-18) discuss certain factors that an entity should consider in selecting a valuation technique or model for its share options or similar instruments. ##### [718-10-55-18](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-18) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:24651b1100bf2f6a4ca3817a3f407b040ee3e6228a66ed1ca98c791b907aa20c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The Black-Scholes-Merton formula assumes that option exercises occur at the end of an option's contractual term, and that expected volatility, expected dividends, and risk-free interest rates are constant over the option's term. If used to estimate the fair value of instruments in the scope of this Topic, the Black-Scholes-Merton formula must be adjusted to take account of certain characteristics of share options and similar instruments that are not consistent with the model's assumptions (for example, exercising before the end of the option's contractual term when estimating expected term). Because of the nature of the formula, those adjustments take the form of weighted-average assumptions about those characteristics. In contrast, a lattice model can be designed to accommodate dynamic assumptions of expected volatility and dividends over the option's contractual term, and estimates of expected option exercise patterns during the option's contractual term, including the effect of [blackout periods](https://asc.understandingaccounting.org/glossary/b/#blackout-period "A period of time during which exercise of an equity share option is contractually or legally prohibited."). Therefore, the design of a lattice model more fully reflects the substantive characteristics of particular share options or similar instruments. Nevertheless, both a lattice model and the Black-Scholes-Merton formula, as well as other valuation techniques that meet the requirements in paragraph [718-10-55-11](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-11), can provide a fair value estimate that is consistent with the measurement objective and fair-value-based method of this Topic. ##### [718-10-55-19](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-19) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:31d1e275d396351c67a35a595c80e60421b3ac69cbb5f058576b17a3be5ca59d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Regardless of the valuation technique or model selected, an entity shall develop reasonable and supportable estimates for each assumption used in the model, including the share option or similar instrument's expected term, taking into account both the contractual term of the option and the effects of grantees' expected exercise and postvesting termination behavior. The term _supportable_ is used in its general sense: capable of being maintained, confirmed, or made good; defensible. An application is supportable if it is based on reasonable arguments that consider the substantive characteristics of the instruments being valued and other relevant facts and circumstances. ##### [718-10-55-20](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-20) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:f991b17624a67ec247d8f6002e30da54cf4a9a866bdd8adc07780d1b39ae0991 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity shall change the valuation technique it uses to estimate fair value if it concludes that a different technique is likely to result in a better estimate of fair value (see paragraph [718-10-55-27](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-27)). For example, an entity that uses a closed-form model might conclude, when information becomes available, that a lattice model or another valuation technique would provide a fair value estimate that better achieves the fair value measurement objective and, therefore, change the valuation technique it uses. ##### [718-10-55-21](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-21) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:1bf9bd0f5a007abfb31b866ae9c5c8a31f79230b37cf867d44961f60d72438dd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If an observable market price is not available for a share option or similar instrument with the same or similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets the requirements in paragraph [718-10-55-11](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-11) and takes into account, at a minimum, all of the following: 1. a The exercise price of the option. 2. b The expected term of the option. This should take into account both the contractual term of the option and the effects of grantees' expected exercise and postvesting termination behavior. In a closed-form model, the expected term is an assumption used in (or input to) the model, while in a lattice model, the expected term is an output of the model (see paragraphs [718-10-55-29 through 55-34](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-29) , which provide further explanation of the expected term in the context of a lattice model). 3. c The current price of the underlying share. 4. d The expected volatility of the price of the underlying share for the expected term of the option. 5. e The expected dividends on the underlying share for the expected term of the option (except as provided in paragraphs [718-10-55-44 through 55-45](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-44) ). 6. f The risk-free interest rate(s) for the expected term of the option. ##### [718-10-55-22](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-22) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:5c650246eb82f1c6e4440dc4ff704c5cf1cad2f5158fcece2844d1a024b21881 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The term _expected_ in (b); (d); (e); and (f) in paragraph [718-10-55-21](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-21) relates to expectations at the [measurement date](https://asc.understandingaccounting.org/glossary/m/#measurement-date "The date at which the equity share price and other pertinent factors, such as expected volatility, that enter into measurement of the total recognized amount of compensation cost for an award of share-based payment are fixed.") about the future evolution of the factor that is used as an assumption in a valuation model. The term is not necessarily used in the same sense as in the term _expected future cash flows_ that appears elsewhere in the Codification. The phrase _expected term of the option_ in (d); (e); and (f) in paragraph [718-10-55-21](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-21) applies to both closed-form models and lattice models (as well as all other valuation techniques). However, if an entity uses a lattice model (or other similar valuation technique, for instance, a Monte Carlo simulation technique) that has been modified to take into account an option's contractual term and grantees' expected exercise and postvesting termination behavior, then (d); (e); and (f) in paragraph [718-10-55-21](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-21) apply to the contractual term of the option. ##### [718-10-55-23](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-23) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:866e93bef7b964dab70f4a9f674e6503de80c6b658c70322028ebaf5adf0557d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. There is likely to be a range of reasonable estimates for expected volatility, dividends, and term of the option. If no amount within the range is more or less likely than any other amount, an average of the amounts in the range (the expected value) shall be used. In a lattice model, the assumptions used are to be determined for a particular node (or multiple nodes during a particular time period) of the lattice and not over multiple periods, unless such application is supportable. ##### [718-10-55-24](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-24) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:2082f7c807c81c8c941263902582efc3339bfb9ccd25da5071444937e6919cb4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Historical experience is generally the starting point for developing expectations about the future. Expectations based on historical experience shall be modified to reflect ways in which currently available information indicates that the future is reasonably expected to differ from the past. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances. For example, an entity with two distinctly different lines of business of approximately equal size may dispose of the one that was significantly less volatile and generated more cash than the other. In that situation, the entity might place relatively little weight on volatility, dividends, and perhaps grantees' exercise and postvesting termination behavior from the predisposition (or disposition) period in developing reasonable expectations about the future. In contrast, an entity that has not undergone such a restructuring might place heavier weight on historical experience. That entity might conclude, based on its analysis of information available at the time of measurement, that its historical experience provides a reasonable estimate of expected volatility, dividends, and grantees' exercise and postvesting termination behavior. This guidance is not intended to suggest either that historical volatility is the only indicator of expected volatility or that an entity must identify a specific event in order to place less weight on historical experience. Expected volatility is an expectation of volatility over the expected term of an option or similar instrument; that expectation shall consider all relevant factors in paragraph [718-10-55-37](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-37), including possible mean reversion. Paragraphs [718-10-55-35 through 55-41](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-35) provide further guidance on estimating expected volatility. ##### [718-10-55-25](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-25) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:9ab23c55cd6a49788927d7c3c7f53ac8905c3c601dbd7f18a3658b13456cd7c6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In certain circumstances, historical information may not be available. For example, an entity whose common stock has only recently become publicly traded may have little, if any, historical information on the volatility of its own shares. That entity might base expectations about future volatility on the average volatilities of similar entities for an appropriate period following their going public. A [nonpublic entity](https://asc.understandingaccounting.org/glossary/n/#nonpublic-entity "Any entity other than one that meets any of the following criteria: 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 Makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market 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.") will need to exercise judgment in selecting a method to estimate expected volatility and might do so by basing its expected volatility on the average volatilities of otherwise similar public entities. For purposes of identifying otherwise similar entities, an entity would likely consider characteristics such as industry, stage of life cycle, size, and financial leverage. Because of the effects of diversification that are present in an industry sector index, the volatility of an index should not be substituted for the average of volatilities of otherwise similar entities in a fair value measurement. ##### [718-10-55-26](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-26) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:51c249a0ee29b1488eb16d07ed918fddc296888277ebf72dced46506a854d1c1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This guidance is organized as follows: 1. a Selecting consistent assumptions 2. b Selecting or estimating the risk-free rate for the expected term 3. c Selecting or estimating the expected term 4. d Selecting or estimating the expected volatility 5. e Selecting or estimating expected dividends 6. f Dividend protected awards 7. g Selecting or considering credit risk 8. h Contingency features that affect the option pricing model 9. i Consider dilution. ##### [718-10-55-27](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-27) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:d041b6eac71a5e04620ecbf985bdc725e70dbddf23f06097c4f671ef5310a9d7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Assumptions used to estimate the fair value of equity and liability instruments granted in share-based payment transactions shall be determined in a consistent manner from period to period. For example, an entity might use the closing share price or the share price at another specified time as the current share price on the grant date in estimating fair value, but whichever method is selected, it shall be used consistently. The valuation technique an entity selects to estimate fair value for a particular type of instrument also shall be used consistently and shall not be changed unless a different valuation technique is expected to produce a better estimate of fair value. A change in either the valuation technique or the method of determining appropriate assumptions used in a valuation technique is a change in accounting estimate for purposes of applying Topic 250, and shall be applied prospectively to new awards. ##### [718-10-55-28](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-28) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:d280146b66305832c13c3c8d554c3aa79db9a29d1b508fc626d54c89ab3d2e58 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Option-pricing models call for the risk-free interest rate as an assumption to take into account, among other things, the time value of money. A U.S. entity issuing an option on its own shares must use as the risk-free interest rates the implied yields currently available from the U.S. Treasury zero-coupon yield curve over the contractual term of the option if the entity is using a lattice model incorporating the option's contractual term. If the entity is using a closed-form model, the risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model. For entities based in jurisdictions outside the United States, the risk-free interest rate is the implied yield currently available on zero-coupon government issues denominated in the currency of the market in which the share (or underlying share), which is the basis for the instrument awarded, primarily trades. It may be necessary to use an appropriate substitute if no such government issues exist or if circumstances indicate that the implied yield on zero-coupon government issues is not representative of a risk-free interest rate. ##### [718-10-55-29](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-29) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:75bf8e67d3ed4af8ab5cac1c08559d7bf6fca50861d9bc8890bbd70f6a926801 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The fair value of a traded (or transferable) share option is based on its contractual term because rarely is it economically advantageous to exercise, rather than sell, a transferable share option before the end of its contractual term. Employee share options generally differ from transferable share options in that employees cannot sell (or hedge) their share options—they can only exercise them; because of this, employees generally exercise their options before the end of the options' contractual term. Thus, the inability to sell or hedge an employee share option effectively reduces the option's value because exercise prior to the option's expiration terminates its remaining life and thus its remaining time value. In addition, some employee share options contain prohibitions on exercise during blackout periods. To reflect the effect of those restrictions (which may lead to exercise before the end of the option's contractual term) on employee options relative to transferable options, this Topic requires that the fair value of an employee share option or similar instrument be based on its expected term, rather than its contractual term (see paragraphs [718-10-55-5](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-5) and [718-10-55-21](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-21)). ##### [718-10-55-29A](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-29A) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:e8f1d11f5b237ad487e98186fe88e324d04a1bacc26b36a634279682290c27fb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [718-10-30-10A](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-10A) states that, on an award-by-award basis, an entity may elect to use the contractual term as the expected term when estimating the fair value of a nonemployee award to satisfy the measurement objective in paragraph [718-10-30-6](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-6). Otherwise, an entity shall apply the guidance in this Topic in estimating the expected term of a nonemployee award, which may result in a term less than the contractual term of the award. If an entity does not elect to use the contractual term as the expected term, similar considerations discussed in paragraph [718-10-55-29](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-29), such as the inability to sell or hedge a nonemployee award, apply when estimating its expected term. ##### [718-10-55-30](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-30) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:0a85da370e51d56aa21fdc0692edd507b244270887014fbab244b83b49324383 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The expected term of an employee share option or similar instrument is the period of time for which the instrument is expected to be outstanding (that is, the period of time from the service inception date to the date of expected exercise or other expected settlement). The expected term is an assumption in a closed-form model. However, if an entity uses a lattice model that has been modified to take into account an option's contractual term and employees' expected exercise and post-vesting employment termination behavior, the expected term is estimated based on the resulting output of the lattice. For example, an entity's experience might indicate that option holders tend to exercise their options when the share price reaches 200 percent of the exercise price. If so, that entity might use a lattice model that assumes exercise of the option at each node along each share price path in a lattice at which the early exercise expectation is met, provided that the option is vested and exercisable at that point. Moreover, such a model would assume exercise at the end of the contractual term on price paths along which the exercise expectation is not met but the options are in-the-money at the end of the contractual term. The terms _at-the-money_, _in-the-money_, and _out-of-the-money_ are used to describe share options whose exercise price is equal to, less than, or greater than the market price of the underlying share, respectively. The valuation approach described recognizes that employees' exercise behavior is correlated with the price of the underlying share. Employees' expected post-vesting employment termination behavior also would be factored in. Expected term, which is a required disclosure (see paragraphs [718-10-50-2 through 50-2A](https://asc.understandingaccounting.org/asc/718/10/#718-10-50-2)), then could be estimated based on the output of the resulting lattice. An example of an acceptable method for purposes of financial statement disclosures of estimating the expected term based on the results of a lattice model is to use the lattice model's estimated fair value of a share option as an input to a closed-form model, and then to solve the closed-form model for the expected term. Other methods also are available to estimate expected term. ##### [718-10-55-31](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-31) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:33abbd0822c58832c114a15fff591565c82d27f61b6326bb1984204ec5b1d74c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Other factors that may affect expectations about employees' exercise and post-vesting employment termination behavior include the following: 1. a The vesting period of the award. An option's expected term must at least include the vesting period. Under some share option arrangements, an option holder may exercise an option prior to vesting (usually to obtain a specific tax treatment); however, such arrangements generally require that any shares received upon exercise be returned to the entity (with or without a return of the exercise price to the holder) if the vesting conditions are not satisfied. Such an exercise is not substantive for accounting purposes. 2. b Employees' historical exercise and post-vesting employment termination behavior for similar grants. 3. c Expected volatility of the price of the underlying share. An entity also might consider whether the evolution of the share price affects an employee's exercise behavior (for example, an employee may be more likely to exercise a share option shortly after it becomes in-the-money if the option had been out-of-the-money for a long period of time). 4. d Blackout periods and other coexisting arrangements such as agreements that allow for exercise to automatically occur during blackout periods if certain conditions are satisfied. 5. e Employees' ages, lengths of service, and home jurisdictions (that is, domestic or foreign). ##### [718-10-55-32](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-32) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:5e328e0534c1a40a64a90bfb276c1213a898952ea8b7457459d5d91e617fd81b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If sufficient information about employees' expected exercise and post-vesting employment termination behavior is available, a method like the one described in paragraph [718-10-55-30](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-30) might be used because that method reflects more information about the instrument being valued (see paragraph [718-10-55-18](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-18)). However, expected term might be estimated in some other manner, taking into account whatever relevant and supportable information is available, including industry averages and other pertinent evidence such as published academic research. ##### [718-10-55-33](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-33) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:d3025ffa1a43b64dd011b8330513ae50447976eca8a3e59dba6cd4d53cbcb8c5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Option value increases at a decreasing rate as the term lengthens (for most, if not all, options). For example, a two-year option is worth less than twice as much as a one-year option, other things equal. Accordingly, estimating the fair value of an option based on a single expected term that effectively averages the differing exercise and postvesting employment termination behaviors of identifiable groups of employees will potentially misstate the value of the entire award. ##### [718-10-55-34](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-34) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:285933670ddfdadbeca16655dc7c0bca2abe20e0219daf98732f06374bbda441 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Aggregating individual awards into relatively homogeneous groups with respect to exercise and postvesting employment termination behaviors and estimating the fair value of the options granted to each group separately reduces such potential misstatement. An entity shall aggregate individual awards into relatively homogeneous groups with respect to exercise and postvesting employment termination behaviors regardless of the valuation technique or model used to estimate the fair value. For example, the historical experience of an employer that grants options broadly to all levels of employees might indicate that hourly employees tend to exercise for a smaller percentage gain than do salaried employees. ##### [718-10-55-34A](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-34A) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:6bb9fe8d70f18bef65234e07d51506120f36808838d841c24bcc35b21fc0ad5c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A nonpublic entity may make an accounting policy election to apply a practical expedient to estimate the expected term for certain awards that do not include a [market condition](https://asc.understandingaccounting.org/glossary/m/#market-condition "A condition affecting the exercise price, exercisability, or other pertinent factors used in determining the fair value of an award under a share-based payment arrangement that relates to the achievement of either of the following: A specified price of the issuer's shares or a specified amount of intrinsic value indexed solely to the issuer's shares A specified price of the issuer's shares in terms of a similar (or index of similar) equity security (securities). The term similar as used in this definition refers to an equity security of another entity that has the same type of residual rights. For example, common stock of one entity generally would be similar to the common stock of another entity for this purpose.") (see paragraphs [718-10-30-20A through 30-20B](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-20A) ). Paragraph [718-10-55-50A](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-50A) provides implementation guidance on the practical expedient. ##### [718-10-55-35](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-35) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:4ce03e7f2993c8bc4f444fe6ab154789ca5221187505d35aaba058090167e7d6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As with other aspects of estimating fair value, the objective is to determine the assumption about expected [volatility](https://asc.understandingaccounting.org/glossary/v/#volatility "A measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. Volatility also may be defined as a probability-weighted measure of the dispersion of returns about the mean. The volatility of a share price is the standard deviation of the continuously compounded rates of return on the share over a specified period. That is the same as the standard deviation of the differences in the natural logarithms of the stock prices plus dividends, if any, over the period. The higher the volatility, the more the returns on the shares can be expected to vary—up or down. Volatility is typically expressed in annualized terms.") that marketplace participants would be likely to use in determining an exchange price for an option. ##### [718-10-55-36](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-36) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:29102c0c5f3a681b53269089415546a9c29067900067e3fbdb689cdcd52a90a9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Volatility is a measure of the amount by which a financial variable, such as share price, has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. Option-pricing models require expected volatility as an assumption because an option's value is dependent on potential share returns over the option's term. The higher the volatility, the more the returns on the shares can be expected to vary—up or down. Because an option's value is unaffected by expected negative returns on the shares, other things equal, an option on a share with higher volatility is worth more than an option on a share with lower volatility. This Topic does not specify a method of estimating expected volatility; rather, the following paragraph provides a list of factors that shall be considered in estimating expected volatility. An entity's estimate of expected volatility shall be reasonable and supportable. ##### [718-10-55-37](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-37) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:6fca7e8ffce9a076371b2e2bbc40e722da09599109fa97577999661293a14ea7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Factors to consider in estimating expected volatility include the following: 1. a Volatility of the share price, including changes in that volatility and possible mean reversion of that volatility. Mean reversion refers to the tendency of a financial variable, such as volatility, to revert to some long-run average level. Statistical models have been developed that take into account the mean-reverting tendency of volatility. In computing historical volatility, for example, an entity might disregard an identifiable period of time in which its share price was extraordinarily volatile because of a failed takeover bid if a similar event is not expected to recur during the expected or contractual term. If an entity's share price was extremely volatile for an identifiable period of time, due to a general market decline, that entity might place less weight on its volatility during that period of time because of possible mean reversion. Volatility over the most recent period is generally commensurate with either of the following: 1. 1 The contractual term of the option if a lattice model is being used to estimate fair value 2. 2 The expected term of the option if a closed-form model is being used. An entity might evaluate changes in volatility and mean reversion over that period by dividing the contractual or expected term into regular intervals and evaluating evolution of volatility through those intervals. 2. b The implied volatility of the share price determined from the market prices of traded options or other traded financial instruments such as outstanding convertible debt, if any. 3. c For a public entity, the length of time its shares have been publicly traded. If that period is shorter than the expected or contractual term of the option, the term structure of volatility for the longest period for which trading activity is available shall be more relevant. A newly public entity also might consider the expected volatility of similar entities. In evaluating similarity, an entity would likely consider factors such as industry, stage of life cycle, size, and financial leverage. A nonpublic entity might base its expected volatility on the expected volatilities of entities that are similar except for having publicly traded securities. 4. d Appropriate and regular intervals for price observations. If an entity considers historical volatility in estimating expected volatility, it shall use intervals that are appropriate based on the facts and circumstances and that provide the basis for a reasonable fair value estimate. For example, a publicly traded entity would likely use daily price observations, while a nonpublic entity with shares that occasionally change hands at negotiated prices might use monthly price observations. 5. e Corporate and capital structure. An entity's corporate structure may affect expected volatility (see paragraph [718-10-55-24](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-24)). An entity's capital structure also may affect expected volatility; for example, highly leveraged entities tend to have higher volatilities. ##### [718-10-55-38](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-38) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:fd4d8600764f566a253a85ebc1280f0ae3f327497e5eae82a586380c39c75f8a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Although use of unadjusted historical volatility may be appropriate for some entities (or even for most entities in some time periods), a marketplace participant would not use historical volatility without considering the extent to which the future is likely to differ from the past. ##### [718-10-55-39](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-39) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:cd73a2c8ee2fb3a24d92f81b137e04b358391d07c3ac57712109744bf6b0162b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A closed-form model, such as the Black-Scholes-Merton formula, cannot incorporate a range of expected volatilities over the option's expected term (see paragraph [718-10-55-18](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-18)). Lattice models can incorporate a term structure of expected volatility; that is, a range of expected volatilities can be incorporated into the lattice over an option's contractual term. Determining how to incorporate a range of expected volatilities into a lattice model to provide a reasonable fair value estimate is a matter of judgment and shall be based on a careful consideration of the factors listed in paragraph [718-10-55-37](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-37) as well as other relevant factors that are consistent with the fair value measurement objective of this Topic. ##### [718-10-55-40](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-40) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:1af1e1064eab153e10d901aeeaace3d8c900bbcaa19ba61ca1f52576aedc346c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity shall establish a process for estimating expected volatility and apply that process consistently from period to period (see paragraph [718-10-55-27](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-27)). That process: 1. a Shall comprehend an identification of information available to the entity and applicable factors such as those described in paragraph [718-10-55-37](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-37) 2. b Shall include a procedure for evaluating and weighting that information. ##### [718-10-55-41](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-41) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:9e85c438b44af5a164e91c08135d21ed49a4ddaa0263d3d621fac826b2a5590a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The process developed by an entity shall be determined by the information available to it and its assessment of how that information would be used to estimate fair value. For example, consistent with paragraph [718-10-55-24](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-24), an entity's starting point in estimating expected volatility might be its historical volatility. That entity also shall consider the extent to which currently available information indicates that future volatility will differ from the historical volatility. An example of such information is implied volatility (from traded options or other instruments). ##### [718-10-55-42](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-42) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:4fec30d2d09dd1c3e19c345888ca818f3ea2b5c7366bbf7d17dfefec2545dadf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Option-pricing models generally call for expected dividend yield as an assumption. However, the models may be modified to use an expected dividend amount rather than a yield. An entity may use either its expected yield or its expected payments. Additionally, an entity's historical pattern of dividend increases (or decreases) shall be considered. For example, if an entity has historically increased dividends by approximately 3 percent per year, its estimated share option value shall not be based on a fixed dividend amount throughout the share option's expected term. As with other assumptions in an option-pricing model, an entity shall use the expected dividends that would likely be reflected in an amount at which the option would be exchanged (see paragraph [718-10-55-13](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-13)). ##### [718-10-55-43](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-43) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:71b99aa153e730de74c63c338178e224380974ef17911c043765660e957e9b88 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As with other aspects of estimating fair value, the objective is to determine the assumption about expected dividends that would likely be used by marketplace participants in determining an exchange price for the option. ##### [718-10-55-44](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-44) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:2f4a97d1f7e58f9ecf6085e94b1c6a02fef51911bfce707277ceda2f7191c8fc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Expected dividends are taken into account in using an option-pricing model to estimate the fair value of a share option because dividends paid on the underlying shares reduce the fair value of those shares and option holders generally are not entitled to receive those dividends. However, an award of share options may be structured to protect option holders from that effect by providing them with some form of dividend rights. Such dividend protection may take a variety of forms and shall be appropriately reflected in estimating the fair value of a share option. For example, if a dividend paid on the underlying shares is applied to reduce the exercise price of the option, the effect of the dividend protection is appropriately reflected by using an expected dividend assumption of zero. ##### [718-10-55-45](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-45) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:fb938382eec5b38c0144573bfbf9d24f34bbba6a339c1191b33e49bb8f115161 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In certain situations, grantees may receive the dividends paid on the underlying equity shares while the option is outstanding. Dividends or dividend equivalents paid to grantees on the portion of an award of equity shares or other equity instruments that vests shall be charged to retained earnings. If grantees are not required to return the dividends or dividend equivalents received if they forfeit their awards, dividends or dividend equivalents paid on instruments that do not vest shall be recognized as additional compensation cost. If an entity's accounting policy is to estimate the number of awards expected to be forfeited in accordance with paragraph [718-10-35-1D](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-1D) or [718-10-35-3](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-3), the estimate of compensation cost for dividends or dividend equivalents paid on instruments that are not expected to vest shall be consistent with an entity's estimates of forfeitures. Dividends and dividend equivalents shall be reclassified between retained earnings and compensation cost in a subsequent period if the entity changes its forfeiture estimates (or actual forfeitures differ from previous estimates). If an entity's accounting policy is to account for forfeitures when they occur in accordance with paragraph [718-10-35-1D](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-1D) or [718-10-35-3](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-3), the entity shall reclassify to compensation cost in the period in which the forfeitures occur the amount of dividends and dividend equivalents previously charged to retained earnings relating to awards that are forfeited. ##### [718-10-55-46](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-46) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:fe9374d4640e97c394c1e091f493c895c16f7c91d66244708c9d4c5a56ba6694 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity may need to consider the effect of its credit risk on the estimated fair value of liability awards that contain cash settlement features because potential cash payoffs from the awards are not independent of the entity's risk of default. Any credit-risk adjustment to the estimated fair value of awards with cash payoffs that increase with increases in the price of the underlying share is expected to be de minimis because increases in an entity's share price generally are positively associated with its ability to liquidate its liabilities. However, a credit-risk adjustment to the estimated fair value of awards with cash payoffs that increase with decreases in the price of the entity's shares may be necessary because decreases in an entity's share price generally are negatively associated with an entity's ability to liquidate its liabilities. ##### [718-10-55-47](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-47) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:e5361e8812e574a7c80bcfdbc955c15b6054b630515cfa5f0c576336f622c76c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Contingent features that might cause a grantee to return to the entity either equity shares earned or realized gains from the sale of equity instruments earned as a result of share-based payment arrangements, such as a clawback feature (see paragraph [718-10-55-8](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-8)), shall not be reflected in estimating the grant-date fair value of an equity instrument. Instead, the effect of such a contingent feature shall be accounted for if and when the contingent event occurs. For instance, a share-based payment arrangement may stipulate the return of vested equity shares to the issuing entity for no consideration if the grantee terminates the employment or vendor relationship to work for a competitor. The effect of that provision on the grant-date fair value of the equity shares shall not be considered. If the issuing entity subsequently receives those shares (or their equivalent value in cash or other assets) as a result of that provision, a credit shall be recognized in the income statement upon the receipt of the shares. That credit is limited to the lesser of the recognized compensation cost associated with the share-based payment arrangement that contains the contingent feature and the fair value of the consideration received. The event is recognized in the income statement because the resulting transaction takes place with a grantee as a result of the current (or prior) employment or vendor relationship rather than as a result of the grantee's role as an equity owner. Example 10 (see paragraph [718-20-55-84](https://asc.understandingaccounting.org/asc/718/20/#718-20-55-84)) provides an illustration of the accounting for an employee award that contains a clawback feature, which also applies to nonemployee awards. ##### [718-10-55-48](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-48) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:87fa20bde203dc1a44c051efd68dadaec52ccacd697efa5ba7fdcb28ab0754d3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Traded options ordinarily are written by parties other than the entity that issues the underlying shares, and when exercised result in an exchange of already outstanding shares between those parties. In contrast, exercise of share options as part of a share-based payment transaction results in the issuance of new shares by the entity that wrote the option (the grantor), which increases the number of shares outstanding. That dilution might reduce the fair value of the underlying shares, which in turn might reduce the benefit realized from option exercise. ##### [718-10-55-49](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-49) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:cd58ff0ee91eb9e0dd76c0ddae8bcf03f5121106075bca319a07f12efe552a04 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the market for an entity's shares is reasonably efficient, the effect of potential dilution from the exercise of share options that are part of a share-based payment transaction will be reflected in the market price of the underlying shares, and no adjustment for potential dilution usually is needed in estimating the fair value of the grantee share options. For a public entity, an exception might be a large grant of options that the market is not expecting, and also does not believe will result in commensurate benefit to the entity. For a nonpublic entity, on the other hand, potential dilution may not be fully reflected in the share price if sufficient information about the frequency and size of the entity's grants of equity share options is not available for third parties who may exchange the entity's shares to anticipate the dilutive effect. ##### [718-10-55-50](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-50) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:ad52a02f8e37e50879db820492bfce409a449a591c7230079a7941d0feadcfb1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity shall consider whether the potential dilutive effect of an award of share options needs to be reflected in estimating the fair value of its options at the grant date. For public entities, the expectation is that situations in which such a separate adjustment is needed will be rare. ##### [718-10-55-50A](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-50A) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:97e7854a77ddec59fc6405751f1607e1050e2abc0d71fd169b9e435bb5ba8eb8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In accordance with paragraph [718-10-30-20A](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-20A), a nonpublic entity may elect a practical expedient to estimate the expected term. For liability-classified awards, an entity would update the estimate of the expected term each reporting period until settlement. The updated estimate should reflect the loss of time value associated with the award and any change in the assessment of whether a performance condition is probable of being achieved. ##### [718-10-55-51](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-51) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:181b3db8693a51bcb527432f9f9d36c78ea17054fb6e7835143a060310c56830 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Nonpublic entities may have sufficient information available on which to base a reasonable and supportable estimate of the expected volatility of their share prices. For example, a nonpublic entity that has an internal market for its shares, has private transactions in its shares, or issues new equity or convertible debt instruments may be able to consider the historical volatility, or implied volatility, of its share price in estimating expected volatility. Alternatively, a nonpublic entity that can identify similar public entities for which share or option price information is available may be able to consider the historical, expected, or implied volatility of those entities' share prices in estimating expected volatility. Similarly this information may be used to estimate the fair value of its shares or to benchmark various aspects of its performance (see paragraph [718-10-55-25](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-25)). ##### [718-10-55-52](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-52) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:4fe69c0d704bd7e942e50c0685ad9cc0bd85ae18b23805fb3ce09c81c8246827 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Topic requires all entities to use the fair-value-based method to account for share-based payment arrangements that are classified as equity instruments. However, if it is not practicable for a nonpublic entity to estimate the expected volatility of its share price, paragraphs [718-10-30-19A through 30-20](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-19A) require it to use the [calculated value](https://asc.understandingaccounting.org/glossary/c/#calculated-value "A measure of the value of a share option or similar instrument determined by substituting the historical volatility of an appropriate industry sector index for the expected volatility of a nonpublic entity's share price in an option-pricing model.") method. Alternatively, it may not be possible for a nonpublic entity to reasonably estimate the fair value of its equity share options and similar instruments at the date they are granted because the complexity of the award's terms prevents it from doing so. In that case, paragraphs [718-10-30-21 through 30-22](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-21) require that the nonpublic entity account for its equity instruments at their [intrinsic value](https://asc.understandingaccounting.org/glossary/i/#intrinsic-value "The amount by which the fair value of the underlying stock exceeds the exercise price of an option. For example, an option with an exercise price of $20 on a stock whose current market price is $25 has an intrinsic value of $5. (A nonvested share may be described as an option on that share with an exercise price of zero. Thus, the fair value of a share is the same as the intrinsic value of such an option on that share.)"), remeasured at each reporting date through the date of exercise or other settlement. ##### [718-10-55-53](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-53) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:040f967fcfcc34b1b28dc819756392898b04bcbc8cefb0badf8ca2179b0e9524 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Many nonpublic entities that plan an initial public offering likely will be able to reasonably estimate the fair value of their equity share options and similar instruments using the guidance on selecting an appropriate expected volatility assumption provided in paragraphs [718-10-55-35 through 55-41](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-35) . ##### [718-10-55-54](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-54) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:9845e7237c00052519e579a4280cf417b2ab59e83c80c15c47a6269c72c07ef0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Estimating the expected volatility of a nonpublic entity's shares may be difficult and that the resulting estimated fair value may be more subjective than the estimated fair value of a public entity's options. However, many nonpublic entities could consider internal and industry factors likely to affect volatility, and the average volatility of comparable entities, to develop an estimate of expected volatility. Using an expected volatility estimate determined in that manner often would result in a reasonable estimate of fair value. ##### [718-10-55-55](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-55) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:7b3abb3245319c301b66c7968acc685f630b1aebddbfd827f27f27916b6ca186 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For purposes of this Topic, it is not practicable for a nonpublic entity to estimate the expected volatility of its share price if it is unable to obtain sufficient historical information about past volatility, or other information such as that noted in paragraph [718-10-55-51](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-51), on which to base a reasonable and supportable estimate of expected volatility at the grant date of the award without undue cost and effort. In that situation, this Topic requires a nonpublic entity to estimate a value for its equity share options and similar instruments by substituting the historical volatility of an appropriate industry sector index for the expected volatility of its share price as an assumption in its valuation model. All other inputs to a nonpublic entity's valuation model shall be determined in accordance with the guidance in paragraphs [718-10-55-4 through 55-47](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-4) . ##### [718-10-55-56](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-56) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:58e41c18965926cfb598908988307e758a4f61f63a09fdb500493d954178da20 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. There are many different indexes available to consider in selecting an appropriate industry sector index. For example, Dow Jones Indexes maintain a global series of stock market indexes with industry sector splits available for many countries, including the United States. The historical values of those indexes are easily obtainable from its website. An appropriate industry sector index is one that is representative of the industry sector in which the nonpublic entity operates and that also reflects, if possible, the size of the entity. If a nonpublic entity operates in a variety of different industry sectors, then it might select a number of different industry sector indexes and weight them according to the nature of its operations; alternatively, it might select an index for the industry sector that is most representative of its operations. If a nonpublic entity operates in an industry sector in which no public entities operate, then it shall select an index for the industry sector that is most closely related to the nature of its operations. However, in no circumstances shall a nonpublic entity use a broad-based market index like the S&P 500, Russell 3000, or Dow Jones Wilshire 5000 because those indexes are sufficiently diversified as to be not representative of the industry sector, or sectors, in which the nonpublic entity operates. ##### [718-10-55-57](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-57) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:fc9106aba21d354b06908b1a953c012d6436552a375ddda5d834c829a9852e2f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A nonpublic entity shall use the selected index consistently, unless the nature of the entity's operations changes such that another industry sector index is more appropriate, in applying the calculated value method in both the following circumstances: 1. a For all of its equity share options or similar instruments 2. b In each accounting period. ##### [718-10-55-58](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-58) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:336f34983792f735bbae02b553f7fa102330142a0c1115498f11e512d36d9a21 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The calculation of the historical volatility of an appropriate industry sector index shall be made using the daily historical closing values of the index selected for the period of time prior to the grant date (or service inception date) of the equity share option or similar instrument that is equal in length to the expected term of the equity share option or similar instrument. If daily values are not readily available, then an entity shall use the most frequent observations available of the historical closing values of the selected index. If historical closing values of the index selected are not available for the entire expected term, then a nonpublic entity shall use the closing values for the longest period of time available. The method used shall be consistently applied (see paragraph [718-10-55-27](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-27)). Example 9 (see paragraph [718-20-55-77](https://asc.understandingaccounting.org/asc/718/20/#718-20-55-77)) provides an illustration of accounting for an equity share option award granted by a nonpublic entity that uses the calculated value method. ##### [718-10-55-59](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-59) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:e211afaef5091b9a2ced720479b4b364a6c84ea59442c8348270377b5d507e0b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This guidance is organized as follows: 1. a Market, performance, and service conditions that affect vesting and exercisability 2. b Market, performance, and service conditions that affect factors other than vesting and exercisability 3. c Estimating the employee's requisite service period 4. d Explicit, implicit, and derived employee's requisite service periods. ##### [718-10-55-60](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-60) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:8395181f739d0f8d58c4b352180f328c7b0d6e897aa7281b65783aeb0fa030d3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A grantee's share-based payment award becomes vested at the date that the grantee's right to receive or retain equity shares, other equity instruments, or assets under the award is no longer contingent on satisfaction of either a performance condition or a [service condition](https://asc.understandingaccounting.org/glossary/s/#service-condition "A condition affecting the vesting, exercisability, exercise price, or other pertinent factors used in determining the fair value of an award that depends solely on an employee rendering service to the employer for the requisite service period or a nonemployee delivering goods or rendering services to the grantor over a vesting period. A condition that results in the acceleration of vesting in the event of a grantee's death, disability, or termination without cause is a service condition."). This Topic distinguishes among market conditions, performance conditions, and service conditions that affect the vesting or exercisability of an award (see paragraphs [718-10-30-12](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-12) and [718-10-30-14](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-14)). Exercisability is used for market conditions in the same context as vesting is used for performance and service conditions. Other conditions affecting vesting, exercisability, exercise price, and other pertinent factors in measuring fair value that do not meet the definitions of a market condition, performance condition, or service condition are discussed in paragraph [718-10-55-65](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-65). ##### [718-10-55-61](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-61) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:651abfa545f6b0ec710745cb7d397048523380a6da860f291cc39c1380c09029 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Analysis of the market, performance, or service conditions (or any combination thereof) that are explicit or implicit in the terms of an award is required to determine the employee's requisite service period or the nonemployee's vesting period over which compensation cost is recognized and whether recognized compensation cost may be reversed if an award fails to vest or become exercisable (see paragraph [718-10-30-27](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-27)). If exercisability or the ability to retain the award (for example, an award of equity shares may contain a market condition that affects the grantee's ability to retain those shares) is based solely on one or more market conditions compensation cost for that award is recognized if the grantee delivers the promised good or renders the service, even if the market condition is not satisfied. If exercisability (or the ability to retain the award) is based solely on one or more market conditions, compensation cost for that award is reversed if the grantee does not deliver the promised good or render the service, unless the market condition is satisfied prior to the end of the employee's requisite service period or the nonemployee's vesting period, in which case any unrecognized compensation cost would be recognized at the time the market condition is satisfied. If vesting is based solely on one or more performance or service conditions, any previously recognized compensation cost is reversed if the award does not vest (that is, the good is not delivered or the service is not rendered or the performance condition is not achieved). Examples 1 through 4 (see paragraphs [718-20-55-4 through 55-50](https://asc.understandingaccounting.org/asc/718/20/#718-20-55-4) ) provide illustrations of awards in which vesting is based solely on performance or service conditions. ##### [718-10-55-61A](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-61A) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:f8f8e73d4a5ea84afe7e34654cf48e057c78e14720baa0b24fa9b560f22fdf01 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An employee award containing one or more market conditions may have an [explicit](https://asc.understandingaccounting.org/glossary/e/#explicit-service-period "A service period that is explicitly stated in the terms of a share-based payment award. For example, an award stating that it vests after three years of continuous employee service from a given date (usually the grant date) has an explicit service period of three years. See Derived Service Period, Implicit Service Period, and Requisite Service Period."), [implicit](https://asc.understandingaccounting.org/glossary/i/#implicit-service-period "A service period that is not explicitly stated in the terms of a share-based payment award but that may be inferred from an analysis of those terms and other facts and circumstances. For instance, if an award of share options vests upon the completion of a new product design and it is probable that the design will be completed in 18 months, the implicit service period is 18 months. See Derived Service Period, Explicit Service Period, and Requisite Service Period."), or [derived service period](https://asc.understandingaccounting.org/glossary/d/#derived-service-period "A service period for an award with a market condition that is inferred from the application of certain valuation techniques used to estimate fair value. For example, the derived service period for an award of share options that the employee can exercise only if the share price increases by 25 percent at any time during a 5-year period can be inferred from certain valuation techniques. In a lattice model, that derived service period represents the duration of the median of the distribution of share price paths on which the market condition is satisfied. That median is the middle share price path (the midpoint of the distribution of paths) on which the market condition is satisfied. The duration is the period of time from the service inception date to the expected date of satisfaction (as inferred from the valuation technique). If the derived service period is three years, the estimated requisite service period is three years and all compensation cost would be recognized over that period, unless the market condition was satisfied at an earlier date. Compensation cost would not be recognized beyond three years even if after the grant date the entity determines that it is not probable that the market condition will be satisfied within that period. Further, an award of fully vested, deep out-of-the-money share options has a derived service period that must be determined from the valuation techniques used to estimate fair value. See Explicit Service Period, Implicit Service Period, and Requisite Service Period."). Paragraphs [718-10-55-69 through 55-79](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-69) provide guidance on explicit, implicit, and derived service periods. ##### [718-10-55-62](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-62) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:0b289957d184f71cdde72ec1be3ae17b78ee5ddc448037997839af0f13a2b900 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Vesting or exercisability may be conditional on satisfying two or more types of conditions (for example, vesting and exercisability occur upon satisfying both a market and a performance or service condition). Vesting also may be conditional on satisfying one of two or more types of conditions (for example, vesting and exercisability occur upon satisfying either a market condition or a performance or service condition). Regardless of the nature and number of conditions that must be satisfied, the existence of a market condition requires recognition of compensation cost if the good is delivered or the service is rendered, even if the market condition is never satisfied. ##### [718-10-55-63](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-63) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:e5be02ff7bbb640a7e9b6ddc6ef77293873fa01732bd4576ce2235bc30f26db0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Even if only one of two or more conditions must be satisfied and a market condition is present in the terms of the award, then compensation cost is recognized if the good is delivered or the service is rendered, regardless of whether the market, performance, or service condition is satisfied (see Example 5 \[paragraph [718-10-55-100](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-100)\] for an example of such an employee award). ##### [718-10-55-64](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-64) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:9dae069e3adae3b62e8485dcd1a88aa024d71085c4d565f2776f93c17b941c81 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Market, performance, and service conditions may affect an award's exercise price, contractual term, quantity, conversion ratio, or other pertinent factors that are relevant in measuring an award's fair value. For instance, an award's quantity may double, or an award's contractual term may be extended, if a company-wide revenue target is achieved. Market conditions that affect an award's fair value (including exercisability) are included in the estimate of grant-date fair value (see paragraph [718-10-30-15](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-15)). Performance or service conditions that only affect vesting are excluded from the estimate of grant-date fair value, but all other performance or service conditions that affect an award's fair value are included in the estimate of grant-date fair value (see that same paragraph). Examples 3, 4, and 6 (see paragraphs [718-20-55-41](https://asc.understandingaccounting.org/asc/718/20/#718-20-55-41), [718-20-55-47](https://asc.understandingaccounting.org/asc/718/20/#718-20-55-47), and [718-20-55-61](https://asc.understandingaccounting.org/asc/718/20/#718-20-55-61)) provide further guidance on how performance conditions are considered in the estimate of grant-date fair value. ##### [718-10-55-65](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-65) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:f4ca34abd8117e7f7f85e43d29642a5593ee8e73507dadae5d2d52bbcd0fffe2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An award may be indexed to a factor in addition to the entity's share price. If that factor is not a market, performance, or service condition, that award shall be classified as a liability for purposes of this Topic (see paragraphs [718-10-25-13 through 25-14A](https://asc.understandingaccounting.org/asc/718/10/#718-10-25-13)). An example would be an award of options whose exercise price is indexed to the market price of a commodity, such as gold. Another example would be a share award that will vest based on the appreciation in the price of a commodity, such as gold; that award is indexed to both the value of that commodity and the issuing entity's shares. If an award is so indexed, the relevant factors shall be included in the fair value estimate of the award. Such an award would be classified as a liability even if the entity granting the share-based payment instrument is a producer of the commodity whose price changes are part or all of the conditions that affect an award's vesting conditions or fair value. ##### [718-10-55-66](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-66) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:0a59eaa9228813a61a31988b8e9d74e22c77711e3aae8fa73c5b78dd54c8fe2f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following flowchart provides guidance on determining how to account for an award based on the existence of market, performance, or service conditions (or any combination thereof). - Accounting for Awards with Market, Performance, or Service Conditions - ![](https://asc.understandingaccounting.org/asc-img/GUID-5C74634C-EF9E-41CE-BB77-A8DCEA7AE0BF-low.gif) ##### [718-10-55-67](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-67) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:f52b5b1bb0157aecde4b2bdd147e2ebe34ec3c5684c0627ce7fb742af979c734 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [718-10-35-2](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-2) requires that compensation cost be recognized over the requisite service period. The requisite service period for an award that has only a service condition is presumed to be the vesting period, unless there is clear evidence to the contrary. The requisite service period shall be estimated based on an analysis of the terms of the award and other relevant facts and circumstances, including co-existing employment agreements and an entity's past practices; that estimate shall ignore nonsubstantive vesting conditions. For example, the grant of a deep out-of-the-money share option award without an explicit service condition will have a derived service period. Likewise, if an award with an explicit service condition that was at-the-money when granted is subsequently modified to accelerate vesting at a time when the award is deep out-of-the-money, that [modification](https://asc.understandingaccounting.org/glossary/m/#modification "A change in the terms or conditions of a share-based payment award.") is not substantive because the explicit service condition is replaced by a derived service condition. If a market, performance, or service condition requires future service for vesting (or exercisability), an entity cannot define a prior period as the requisite service period. The requisite service period for awards with market, performance, or service conditions (or any combination thereof) shall be consistent with assumptions used in estimating the grant-date fair value of those awards. ##### [718-10-55-68](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-68) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:0537c6c08a5159526590a3124c17d10eab22aea2779ef6e4715616d3e9d3528e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An employee's share-based payment award becomes vested at the date that the employee's right to receive or retain equity shares, other equity instruments, or cash under the award is no longer contingent on satisfaction of either a performance condition or a service condition. Any unrecognized compensation cost shall be recognized when an award becomes vested. If an award includes no market, performance, or service conditions, then the entire amount of compensation cost shall be recognized when the award is granted (which also is the date of issuance in this case). Example 1 (see paragraph [718-10-55-86](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-86)) provides an illustration of estimating the requisite service period. ##### [718-10-55-69](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-69) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:0ca2f6467543d34cf6eb73e526e833697ff37379ffbefb888ac2fadc4cb51708 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A requisite service period for an employee may be explicit, implicit, or derived. An [explicit service period](https://asc.understandingaccounting.org/glossary/e/#explicit-service-period "A service period that is explicitly stated in the terms of a share-based payment award. For example, an award stating that it vests after three years of continuous employee service from a given date (usually the grant date) has an explicit service period of three years. See Derived Service Period, Implicit Service Period, and Requisite Service Period.") is one that is stated in the terms of the share-based payment award. For example, an award that vests after three years of continuous employee service has an explicit service period of three years, which also would be the requisite service period. ##### [718-10-55-70](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-70) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:3dbaa5f9bb5a42a8edb5d07a899bdf7a1ffa982a053dbe2930217055a6082f68 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An [implicit service period](https://asc.understandingaccounting.org/glossary/i/#implicit-service-period "A service period that is not explicitly stated in the terms of a share-based payment award but that may be inferred from an analysis of those terms and other facts and circumstances. For instance, if an award of share options vests upon the completion of a new product design and it is probable that the design will be completed in 18 months, the implicit service period is 18 months. See Derived Service Period, Explicit Service Period, and Requisite Service Period.") is one that may be inferred from an analysis of an award's terms. For example, if an award of share options vests only upon the completion of a new product design and the design is expected to be completed 18 months from the grant date, the implicit service period is 18 months, which also would be the requisite service period. ##### [718-10-55-71](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-71) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:9977f410f9031770f9d77db3c3a40f85390ad03acdb285d8c3f314b901d55085 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A derived service period is based on a market condition in a share-based payment award that affects exercisability, exercise price, or the employee's ability to retain the award. A derived service period is inferred from the application of certain valuation techniques used to estimate fair value. For example, the derived service period for an award of share options that an employee can exercise only if the share price doubles at any time during a five-year period can be inferred from certain valuation techniques that are used to estimate fair value. This example, and others noted in this Section, implicitly assume that the rights conveyed by the instrument to the holder are dependent on the holder's being an employee of the entity. That is, if the employment relationship is terminated, the award lapses or is forfeited shortly thereafter. In a lattice model, that derived service period represents the duration of the median of the distribution of share price paths on which the market condition is satisfied. That median is the middle share price path (the midpoint of the distribution of paths) on which the market condition is satisfied. The duration is the period of time from the service inception date to the expected date of market condition satisfaction (as inferred from the valuation technique). For example, if the derived service period is three years, the requisite service period is three years and all compensation cost would be recognized over that period, unless the market condition is satisfied at an earlier date, in which case any unrecognized compensation cost would be recognized immediately upon its satisfaction. If the requisite service is not rendered, all previously recognized compensation cost would be reversed. If the requisite service is rendered, the recognized compensation is not reversed even if the market condition is never satisfied. An entity that uses a closed-form model to estimate the grant-date fair value of an award with a market condition may need to use another valuation technique to estimate the derived service period. ##### [718-10-55-72](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-72) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:6d605507c205eab249429ada8dfbe708d5825063e94fa816d5469b73e146232f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An award with a combination of market, performance, or service conditions may contain multiple explicit, implicit, or derived service periods. For such an award, the estimate of the requisite service period shall be based on an analysis of all of the following: 1. a All vesting and exercisability conditions 2. b All explicit, implicit, and derived service periods 3. c The probability that performance or service conditions will be satisfied. ##### [718-10-55-73](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-73) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:6ce2a6b74d8e82547fa9cdcbab7d533adddc1c66a86ea65eefd4a5383f6de337 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Thus, if vesting (or exercisability) of an award is based on satisfying both a market condition and a performance or service condition and it is probable that the performance or service condition will be satisfied, the initial estimate of the requisite service period generally is the longest of the explicit, implicit, or derived service periods. If vesting (or exercisability) of an award is based on satisfying either a market condition or a performance or service condition and it is probable that the performance or service condition will be satisfied, the initial estimate of the requisite service period generally is the shortest of the explicit, implicit, or derived service periods. ##### [718-10-55-74](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-74) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:91920a9f18f07493a3c7f33a8f12c3f116ecf06350a31b733fee4928e360cac8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For example, a share option might specify that vesting occurs after three years of continuous employee service or when the employee completes a specified project. The employer estimates that it is [probable](https://asc.understandingaccounting.org/glossary/p/#probable "The future event or events are likely to occur.") that the project will be completed within 18 months. The employer also believes it is probable that the service condition will be satisfied. Thus, that award contains an explicit service period of 3 years related to the service condition and an implicit service period of 18 months related to the performance condition. Because it is considered probable that both the performance condition and the service condition will be achieved, the requisite service period over which compensation cost is recognized is 18 months, which is the shorter of the explicit and implicit service periods. ##### [718-10-55-75](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-75) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:c4bac1153d4d2256ee3dc31416153c30315da954788e3e5a3eb39d8103b080cd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As illustrated in the preceding paragraph , if an award vests upon the earlier of the satisfaction of a service condition (for example, four years of service) or the satisfaction of one or more performance conditions, it will be necessary to estimate when, if at all, the performance conditions are probable of achievement. For example, if initially the four-year service condition is probable of achievement and no performance condition is probable of achievement, the requisite service period is four years. If one year into the four-year requisite service period a performance condition becomes probable of achievement by the end of the second year, the requisite service period would be revised to two years for attribution of compensation cost (at that point in time, there would be only one year of the two-year requisite service period remaining). ##### [718-10-55-76](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-76) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:e7ab40c38ea37e1893740d18b948a2b0d2a1a5fb01dfcb903838cbc70103d235 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If an award vests upon the satisfaction of both a service condition and the satisfaction of one or more performance conditions, the entity also must initially determine which outcomes are probable of achievement. For example, an award contains a four-year service condition and two performance conditions, all of which need to be satisfied. If initially the four-year service condition is probable of achievement and no performance condition is probable of achievement, then no compensation cost would be recognized unless the two performance conditions and the service condition subsequently become probable of achievement. If both performance conditions become probable of achievement one year after the grant date and the entity estimates that both performance conditions will be achieved by the end of the second year, the requisite service period would be four years as that is the longest period of both the explicit service period and the implicit service periods. Because the performance conditions are now probable of achievement, compensation cost will be recognized in the period of the change in estimate (see paragraph [718-10-35-3](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-3)) as the cumulative effect on current and prior periods of the change in the estimated number of awards for which the requisite service is expected to be rendered. Therefore, compensation cost for the first year will be recognized immediately at the time of the change in estimate for the awards for which the requisite service is expected to be rendered. The remaining unrecognized compensation cost for those awards would be recognized prospectively over the remaining requisite service period. An entity that has an accounting policy to account for forfeitures when they occur in accordance with paragraph [718-10-35-3](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-3) would assume that the achievement of a service condition is probable when determining the amount of compensation cost to recognize unless the award has been forfeited. ##### [718-10-55-77](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-77) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:45c69ea668c3721db9bcb3b63058d2468048a2164c638e73787ccbd8e784f83d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As indicated in paragraph [718-10-55-75](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-75), the initial estimate of the requisite service period based on an explicit or implicit service period shall be adjusted for changes in the expected and actual outcomes of the related service or performance conditions that affect vesting of the award. Such adjustments will occur as the entity revises its estimates of whether or when different conditions or combinations of conditions are probable of being satisfied. Compensation cost ultimately recognized is equal to the grant-date fair value of the award based on the actual outcome of the performance or service conditions (see paragraph [718-10-30-15](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-15)). If an award contains a market condition and a performance or a service condition and the initial estimate of the requisite service period is based on the market condition's derived service period, then the requisite service period shall not be revised unless either of the following criteria is met: 1. a The market condition is satisfied before the end of the derived service period 2. b Satisfying the market condition is no longer the basis for determining the requisite service period. ##### [718-10-55-78](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-78) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:c76dd2953c2bfb757b0dda7ec8e22e8a5d40e270c148eceb8dd41b3811149be4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. How a change to the initial estimate of the requisite service period is accounted for depends on whether that change would affect the grant-date fair value of the award (including the quantity of instruments) that is to be recognized as compensation. For example, if the quantity of instruments for which the requisite service is expected to be rendered changes because a vesting condition becomes probable of satisfaction or if the grant-date fair value of an instrument changes because another performance or service condition becomes probable of satisfaction (for example, a performance or service condition that affects exercise price becomes probable of satisfaction), the cumulative effect on current and prior periods of those changes in estimates shall be recognized in the period of the change. In contrast, if compensation cost is already being attributed over an initially estimated requisite service period and that initially estimated period changes solely because another market, performance, or service condition becomes the basis for the requisite service period, any unrecognized compensation cost at that date of change shall be recognized prospectively over the revised requisite service period, if any (that is, no cumulative-effect adjustment is recognized). ##### [718-10-55-79](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-79) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:0633accf80b0bc76bf73e579933bd2430f36ba4bde7a2bfe2b86fd97e4c091f0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. To summarize, changes in actual or estimated outcomes that affect either the grant-date fair value of the instrument awarded or the quantity of instruments for which the requisite service is expected to be rendered (or both) are accounted for using a cumulative effect adjustment, and changes in estimated requisite service periods for awards for which compensation cost is already being attributed are accounted for prospectively only over the revised requisite service period, if any. ##### [718-10-55-80](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-80) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:8ef91d71492150dc64434e3717c0267c0e13f50a095f7413bccd9d010eea168f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This guidance expands on the guidance provided in paragraph [718-10-25-5](https://asc.understandingaccounting.org/asc/718/10/#718-10-25-5). ##### [718-10-55-81](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-81) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:be4b2798c0d9482c17cd689bbbd322bd31e1bbe54db7c81a1b9b948c4b59b3b5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The definition of grant date requires that a grantor and a grantee have a mutual understanding of the key terms and conditions of the share-based compensation arrangement. Those terms may be established through any of the following: 1. a A formal, written agreement 2. b An informal, oral arrangement 3. c An entity's past practice. ##### [718-10-55-82](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-82) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:684d36bbe6ced0a859ae6fa958fc7c36aec83bf20812c68e5763387c697c29aa Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A mutual understanding of the key terms and conditions means that there is sufficient basis for both the grantor and the grantee to understand the nature of the relationship established by the award, including both the compensatory relationship and the equity relationship subsequent to the date of grant. The grant date for an award will be the date that a grantee begins to benefit from, or be adversely affected by, subsequent changes in the price of the grantor's equity shares. In order to assess that financial exposure, the grantor and grantee must agree to the terms; that is, there must be a mutual understanding. Awards made under an arrangement that is subject to shareholder approval are not deemed to be granted until that approval is obtained unless approval is essentially a formality (or perfunctory). Additionally, to have a grant date for an award to an employee, the recipient of that award must meet the definition of an [employee](https://asc.understandingaccounting.org/glossary/e/#employee "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. 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. A leased individual is deemed to be an employee of the lessee if all of the following requirements are met: 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. The lessor and lessee agree in writing to all of the following conditions related to the leased individual: The lessee has the exclusive right to grant stock compensation to the individual for the employee service to the lessee. The lessee has a right to hire, fire, and control the activities of the individual. (The lessor also may have that right.) 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). 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. 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. (P) December 16, 2026; (N) December 16, 2026220-40-65-1An individual over whom a reporting entity 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, an individual meets the definition of an employee if the reporting entity 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 reporting entity that classifies an individual potentially subject to U.S. payroll taxes as an employee also must represent that individual as an employee for payroll tax purposes (unless the individual is a leased employee as described below). An individual that meets the definition of an employee includes, but is not limited to, a full-time, part-time, temporary, or seasonal employee. An individual does not meet the definition of an employee solely because the reporting entity represents that individual as an employee for some, but not all, purposes. For example, a requirement or decision to classify an individual as an employee for U.S. payroll tax purposes does not, by itself, indicate that the individual is an employee because the individual also must be an employee of the reporting entity under common law. A leased individual is deemed to be an employee of the lessee if all of the following requirements are met: 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. The lessor and lessee agree in writing to all of the following conditions related to the leased individual: The lessee has the exclusive right to grant compensation to the individual for the employee service to the lessee. The lessee has a right to hire, fire, and control the activities of the individual. (The lessor also may have that right.) 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). 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. 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 and other compensation granted to nonemployee directors for their services as directors. Awards granted and compensation paid to those individuals for other services shall be accounted for as awards and compensation to nonemployees."). ##### [718-10-55-83](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-83) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:4acff6f6967473c5c6e5478d0f9c1d3ca9aea30adce3cb0c48812d1882740f96 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The determination of the grant date shall be based on the relevant facts and circumstances. For instance, a look-back share option may be granted with an exercise price equal to the lower of the current share price or the share price one year hence. The ultimate exercise price is not known at the date of grant, but it cannot be greater than the current share price. In this case, the relationship between the exercise price and the current share price provides a sufficient basis to understand both the compensatory and equity relationship established by the award; the recipient begins to benefit from subsequent changes in the price of the grantor's equity shares. However, if the award's terms call for the exercise price to be set equal to the share price one year hence, the recipient does not begin to benefit from, or be adversely affected by, changes in the price of the grantor's equity shares until then. Therefore, grant date would not occur until one year hence. Awards of share options whose exercise price is determined solely by reference to a future share price generally would not provide a sufficient basis to understand the nature of the compensatory and equity relationships established by the award until the exercise price is known. ##### [718-10-55-84](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-84) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:4b05e36454d7a0fdd80e83186bdccfde28b55d1d27108ad750c51fddc8c5d50a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following paragraph further explains the guidance in paragraphs [718-10-25-9 through 25-12](https://asc.understandingaccounting.org/asc/718/10/#718-10-25-9) . ##### [718-10-55-85](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-85) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:b54430dbfde8a532079b549e3c052176e35b036d51b556fe1869e75d795c1a61 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity may, for example, grant shares under a share-based compensation arrangement that the grantee can put (sell) to the grantor (the entity) shortly after the vesting date for cash equal to the fair value of the shares on the date of repurchase. That award of puttable shares would be classified as a liability because the repurchase feature permits the grantee to avoid bearing the risks and rewards normally associated with equity share ownership for a reasonable period of time from the date the share is issued (see paragraph [718-10-25-9(a)](https://asc.understandingaccounting.org/asc/718/10/#718-10-25-9)). Alternatively, an entity might grant its own shares under a share-based compensation arrangement that may be put to the grantor only after the grantee has held them for a reasonable period of time after vesting but at a fixed redemption amount. Those puttable shares also would be classified as liabilities under the requirements of this Topic because the repurchase price is based on a fixed amount rather than variations in the fair value of the grantor's shares. The grantee cannot bear the risks and rewards normally associated with equity share ownership for a reasonable period of time because of that redemption feature. However, if a share with a repurchase feature gives the grantee the right to sell shares back to the entity for a fixed amount over the fair value of the shares at the date of repurchase, paragraph [718-20-35-7](https://asc.understandingaccounting.org/asc/718/20/#718-20-35-7) requires that the fixed amount over the fair value be recognized and attributed as additional compensation cost over the employee's requisite service period (with a corresponding liability being accrued). The fixed amount over the fair value of a nonemployee award should be recognized as additional compensation cost over the vesting period (with a corresponding liability being accrued) in accordance with paragraph [718-10-25-2C](https://asc.understandingaccounting.org/asc/718/10/#718-10-25-2C). ##### [718-10-55-85A](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-85A) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:8f65afddf05f395ef0f91b862d59569b9f57d83be8b4daf71b6863b404820b1d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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: 1. 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. 2. 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. #### Illustrations ##### [718-10-55-86](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-86) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:ed005c5ca9274dbbbb825f21e40cc8605e1835cbdab68305d4d4e7a4828a6b58 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraphs [718-10-30-25 through 30-26](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-25) . ##### [718-10-55-87](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-87) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:910bcdbcb047ed66b5ad7ecfdb461f71c2f07d8b91a15ef979c5afb5d5435181 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Assume that Entity A uses a point system for retirement. An employee who accumulates 60 points becomes eligible to retire with certain benefits, including the retention of any nonvested share-based payment awards for their remaining contractual life, even if another explicit service condition has not been satisfied. In this case, the point system effectively accelerates vesting. On January 1, 20X5, an employee receives at-the-money options on 100 shares of Entity A's stock. All options vest at the end of 3 years of service and have a 10-year contractual term. At the grant date, the employee has 60 points and, therefore, is eligible to retire at any time. ##### [718-10-55-88](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-88) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:bc3b2b91a1fb5d88a1c9457faa24984c1df0f85825779a2f1d46c911c1dbe814 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Because the employee is eligible to retire at the grant date, the award's explicit service condition is nonsubstantive. Consequently, Entity A has granted an award that does not contain a service condition for vesting, that is, the award is effectively vested, and thus, the award's entire fair value should be recognized as compensation cost on the grant date. All of the [terms of a share-based payment award](https://asc.understandingaccounting.org/glossary/t/#terms-of-a-share-based-payment-award "The 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.") and other relevant facts and circumstances must be analyzed when determining the requisite service period. ##### [718-10-55-89](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-89) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:92d807e2dedeaa1a0da2325ebec53d90d43f5d2326c5f649d187ec6171483def Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the evaluation as to whether an individual meets conditions to be considered an [employee](https://asc.understandingaccounting.org/glossary/e/#employee "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. 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. A leased individual is deemed to be an employee of the lessee if all of the following requirements are met: 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. The lessor and lessee agree in writing to all of the following conditions related to the leased individual: The lessee has the exclusive right to grant stock compensation to the individual for the employee service to the lessee. The lessee has a right to hire, fire, and control the activities of the individual. (The lessor also may have that right.) 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). 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. 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. (P) December 16, 2026; (N) December 16, 2026220-40-65-1An individual over whom a reporting entity 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, an individual meets the definition of an employee if the reporting entity 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 reporting entity that classifies an individual potentially subject to U.S. payroll taxes as an employee also must represent that individual as an employee for payroll tax purposes (unless the individual is a leased employee as described below). An individual that meets the definition of an employee includes, but is not limited to, a full-time, part-time, temporary, or seasonal employee. An individual does not meet the definition of an employee solely because the reporting entity represents that individual as an employee for some, but not all, purposes. For example, a requirement or decision to classify an individual as an employee for U.S. payroll tax purposes does not, by itself, indicate that the individual is an employee because the individual also must be an employee of the reporting entity under common law. A leased individual is deemed to be an employee of the lessee if all of the following requirements are met: 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. The lessor and lessee agree in writing to all of the following conditions related to the leased individual: The lessee has the exclusive right to grant compensation to the individual for the employee service to the lessee. The lessee has a right to hire, fire, and control the activities of the individual. (The lessor also may have that right.) 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). 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. 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 and other compensation granted to nonemployee directors for their services as directors. Awards granted and compensation paid to those individuals for other services shall be accounted for as awards and compensation to nonemployees.") under the definition of that term used in this Topic. ##### [718-10-55-90](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-90) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:7d59b47ab821ccffd123fab8cc4dc78ae97474aeada8b10eb373394d4ecb26a8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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 of the Advisory Board are knowledgeable about Entity A's industry and advise Entity A on matters such as policy development, strategic planning, and product development. The Advisory Board members are appointed for two-year terms and meet four times a year for one day, receiving a fixed number of options for services rendered at each meeting. Based on an evaluation of the relationship between Entity A and the Advisory Board members, Entity A concludes that the Advisory Board members do not meet the common law definition of employee. Accordingly, the awards to the Advisory Board members are accounted for as awards to nonemployees under the provisions of this Topic. ##### [718-10-55-91](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-91) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:049edf50b3092e90477b5385ca81c20c86a20b625f1e530c60a87d6a4632bfa9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Nonemployee directors acting in their role as members of an entity's board of directors shall be treated as employees if those directors were elected by the entity'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 them for their services as directors. Awards granted to those individuals for other services shall be accounted for as awards to nonemployees in accordance with Section 505-50-25. Additionally, consolidated groups may have multiple boards of directors; this guidance applies only to either of the following: 1. a The nonemployee directors acting in their role as members of a parent entity's board of directors 2. b Nonemployee members of a consolidated subsidiary's board of directors to the extent that those members are elected by shareholders that are not controlled directly or indirectly by the parent or another member of the consolidated group. ##### [718-10-55-92](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-92) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:aeeb3ea2363076c9894cf708347333dd40bebbcc9deab206fe8722130597148d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate employee share-based payment awards with a performance condition (see paragraphs [718-10-25-20 through 25-21](https://asc.understandingaccounting.org/asc/718/10/#718-10-25-20) ; [718-10-30-27](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-27); and [718-10-35-4](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-4)) and multiple service dates: 1. a Performance targets are set at the inception of the arrangement (Case A). 2. b Performance targets are established at some time in the future (Case B). 3. c Performance targets established up front but vesting is tied to the vesting of a preceding award (Case C). ##### [718-10-55-93](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-93) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:29f11ff454e8ceaed8646a5393d47d1cc2b8c483746187a7bca7a245b8455759 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Cases A, B, and C share the following assumptions: 1. a On January 1, 20X5, Entity T enters into an arrangement with its chief executive officer relating to 40,000 share options on its stock with an exercise price of $30 per option. 2. b The arrangement is structured such that 10,000 share options will vest or be forfeited in each of the next 4 years (20X5 through 20X8) depending on whether annual performance targets relating to Entity T's revenues and net income are achieved. ##### [718-10-55-94](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-94) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:08de69a334f2f19f61ecc5d37c86e6ea8c18c8ea36ed1a22049ca010b4c2fe11 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. All of the annual performance targets are set at the inception of the arrangement. Because a mutual understanding of the key terms and conditions is reached on January 1, 20X5, each tranche would have a grant date and, therefore, a measurement date, of January 1, 20X5. However, each tranche of 10,000 share options should be accounted for as a separate award with its own service inception date, grant-date fair value, and 1-year requisite service period, because the arrangement specifies for each tranche an independent performance condition for a stated period of service. The chief executive officer's ability to retain (vest in) the award pertaining to 20X5 is not dependent on service beyond 20X5, and the failure to satisfy the performance condition in any one particular year has no effect on the outcome of any preceding or subsequent period. This arrangement is similar to an arrangement that would have provided a $10,000 cash bonus for each year for satisfaction of the same performance conditions. The four separate service inception dates (one for each tranche) are at the beginning of each year. ##### [718-10-55-95](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-95) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:6b279137330d13fb238024ed4a3e4609a5c17cdf252fc74deb9b37a088f16ff1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the arrangement had instead provided that the annual performance targets would be established during January of each year, the grant date (and, therefore, the measurement date) for each tranche would be that date in January of each year (20X5 through 20X8) because a mutual understanding of the key terms and conditions would not be reached until then. In that case, each tranche of 10,000 share options has its own service inception date, grant-date fair value, and 1-year requisite service period. The fair value measurement of compensation cost for each tranche would be affected because not all of the key terms and conditions of each award are known until the compensation committee sets the performance targets and, therefore, the grant dates are those dates. ##### [718-10-55-96](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-96) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:f7085e7384b8903684e4743c3270b46c3d84f6cd6a803f5b2b1716a49eea2d98 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the arrangement in Case A instead stated that the vesting for awards in periods from 20X6 through 20X8 was dependent on satisfaction of the performance targets related to the preceding award, the requisite service provided in exchange for each preceding award would not be independent of the requisite service provided in exchange for each successive award. In contrast to the arrangement described in Case A, failure to achieve the annual performance targets in 20X5 would result in forfeiture of all awards. The requisite service provided in exchange for each successive award is dependent on the requisite service provided for each preceding award. In that circumstance, all awards have the same service inception date and the same grant date (January 1, 20X5); however, each award has its own explicit service period (for example, the 20X5 grant has a one-year service period, the 20X6 grant has a two-year service period, and so on) over which compensation cost would be recognized. Because this award contains a performance condition, it is not subject to the attribution guidance in paragraph [718-10-35-8](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-8). ##### [718-10-55-97](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-97) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:4e793f5badff059e6b61ae0d874155f372665e74ad4c1866047966630b1319f5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate the guidance in paragraph [718-10-30-12](https://asc.understandingaccounting.org/asc/718/10/#718-10-30-12) to determine the service period for employee awards with multiple service periods: 1. a Exercise price established at subsequent dates (Case A) 2. b Exercise price established at inception (Case B). ##### [718-10-55-98](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-98) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:75f44b0661bd68b87728bb2f6dd9f921e65cec8ed7c0d2373f4f45c63c102176 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The chief executive officer of Entity T enters into a five-year employment contract on January 1, 20X5. The contract stipulates that the chief executive officer will be given 10,000 fully vested share options at the end of each year (50,000 share options in total). The exercise price of each tranche will be equal to the market price at the date of issuance (December 31 of each year in the five-year contractual term). In this Case, there are five separate grant dates. The grant date for each tranche is December 31 of each year because that is the date when there is a mutual understanding of the key terms and conditions of the agreement—that is, the exercise price is known and the chief executive officer begins to benefit from, or be adversely affected by, subsequent changes in the price of the employer's equity shares (see paragraphs [718-10-55-80 through 55-83](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-80) for additional guidance on determining the grant date). Because the awards' terms do not include a substantive future requisite service condition that exists at the grant date (the options are fully vested when they are issued), and the exercise price (and, therefore, the grant date) is determined at the end of each period, the service inception date precedes the grant date. The requisite service provided in exchange for the first award (pertaining to 20X5) is independent of the requisite service provided in exchange for each consecutive award. The terms of the share-based compensation arrangement provide evidence that each tranche compensates the chief executive officer for one year of service, and each tranche shall be accounted for as a separate award with its own service inception date, grant date, and one-year service period; therefore, the provisions of paragraph [718-10-35-8](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-8) would not be applicable to this award because of its structure. ##### [718-10-55-99](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-99) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:c4704124d00a3ac663d1ed2d4bb4f2e38682378d91b3962eb5409382fe478b1e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the arrangement described in Case A provided instead that the exercise price for all 50,000 share options would be the January 1, 20X5, market price, then the grant date (and, therefore, the measurement date) for each tranche would be January 1, 20X5, because that is the date at which there is a mutual understanding of the key terms and conditions. All tranches would have the same service inception date and the same grant date (January 1, 20X5). Because of the nature of this award, Entity T would make a policy decision pursuant to paragraph [718-10-35-8](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-8) as to whether it considers the award as in-substance, multiple awards each with its own requisite service period (that is, the 20X5 grant has a one-year service period, the 20X6 grant has a two-year service period, and so on) or whether the entity considers the award as a single award with a single requisite service period based on the last separately vesting portion of the award (that is, a requisite service period of five years). Once chosen, this Topic requires that accounting policy be applied consistently to all similar awards. ##### [718-10-55-100](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-100) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:c66b58d8df314197b94d3033e6c28dcf24f67f429e0166804f3b61ee584c3ba5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate the guidance in paragraph [718-10-35-5](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-5) applicable to employee awards in circumstances in which an award includes both a market condition and a service condition: 1. a When only one condition must be met (Case A) 2. b When both conditions must be met (Case B). ##### [718-10-55-101](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-101) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:71df79ea382d128b345cdb531a5026748b069d563a638343c3c641d5f84e8296 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Cases A and B share the following assumptions. ##### [718-10-55-102](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-102) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:e1148db8185a82db61e813e23f156499262d8ba316a9defb5839cf74476a6602 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. On January 1, 20X5, Entity T grants an executive 200,000 share options on its stock with an exercise price of $30 per option. The award specifies that vesting (or exercisability) will occur upon the earlier of the following for Case A or both are met for Case B: 1. a The share price reaching and maintaining at least $70 per share for 30 consecutive trading days 2. b The completion of eight years of service. ##### [718-10-55-103](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-103) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:56998c086dd8309833b595b8303a1c89db47425ed437b2c91191a4e123cb4d2f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The award contains an explicit service period of eight years related to the service condition and a derived service period related to the market condition. ##### [718-10-55-104](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-104) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:27d99a8f36333b83a4470a8d8d32bf6040c51d9c458c2dcbe198e6e95adff647 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity shall make its best estimate of the [derived service period](https://asc.understandingaccounting.org/glossary/d/#derived-service-period "A service period for an award with a market condition that is inferred from the application of certain valuation techniques used to estimate fair value. For example, the derived service period for an award of share options that the employee can exercise only if the share price increases by 25 percent at any time during a 5-year period can be inferred from certain valuation techniques. In a lattice model, that derived service period represents the duration of the median of the distribution of share price paths on which the market condition is satisfied. That median is the middle share price path (the midpoint of the distribution of paths) on which the market condition is satisfied. The duration is the period of time from the service inception date to the expected date of satisfaction (as inferred from the valuation technique). If the derived service period is three years, the estimated requisite service period is three years and all compensation cost would be recognized over that period, unless the market condition was satisfied at an earlier date. Compensation cost would not be recognized beyond three years even if after the grant date the entity determines that it is not probable that the market condition will be satisfied within that period. Further, an award of fully vested, deep out-of-the-money share options has a derived service period that must be determined from the valuation techniques used to estimate fair value. See Explicit Service Period, Implicit Service Period, and Requisite Service Period.") related to the market condition (see paragraph [718-10-55-71](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-71)). The derived service period may be estimated using any reasonable methodology, including Monte Carlo simulation techniques. For this Case, the derived service period is assumed to be six years. As described in paragraphs [718-10-55-72 through 55-73](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-72) , if an award's vesting (or exercisability) is conditional upon the achievement of either a market condition or performance or service conditions, the requisite service period is generally the shortest of the explicit, implicit, and derived service periods. In this Case, the requisite service period over which compensation cost would be attributed is six years (shorter of eight and six years). (An entity may grant a fully vested deep out-of-the-money share option that would lapse shortly after termination of service, which is the equivalent of an award with both a market condition and a service condition. The explicit service period associated with the explicit service condition is zero; however, because the option is deep out-of-the-money at the grant date, there would be a derived service period.) ##### [718-10-55-105](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-105) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:52d35539621c6cdbaf19b713b002daa39d97740ef27ad9de283b51377c6d1c9e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Continuing with this Case, if the market condition is actually satisfied in February 20X9 (based on market prices for the prior 30 consecutive trading days), Entity T would immediately recognize any unrecognized compensation cost because no further service is required to earn the award. If the market condition is not satisfied as of that date but the executive renders the six years of requisite service, compensation cost shall not be reversed under any circumstances. ##### [718-10-55-106](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-106) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:5dd60002b1ad7149f9b91581a5a58b41d9c186bd96fb8d51fd836b924254a69a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The initial estimate of the requisite service period for an award requiring satisfaction of both market and performance or service conditions is generally the longest of the explicit, implicit, and derived service periods (see paragraphs [718-10-55-72 through 55-73](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-72) ). For example, if the award described in Case A required both the completion of 8 years of service and the share price reaching and maintaining at least $70 per share for 30 consecutive trading days, compensation cost would be recognized over the 8-year explicit service period. If the employee were to terminate service prior to the eight-year requisite service period, compensation cost would be reversed even if the market condition had been satisfied by that time. ##### [718-10-55-107](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-107) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:fa8b425d3f30fff636c5f5af523b7c2194a3c2c0d0cd5b4ec55226ee04f8e094 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Example illustrates the guidance in paragraph [718-10-35-6](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-6). ##### [718-10-55-108](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-108) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:ec543019daed20e944a2dc334796d8a558ccb7b9b4e89504ff8a2fc0e0e5d235 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Topic distinguishes between [service inception date](https://asc.understandingaccounting.org/glossary/s/#service-inception-date "The date at which the employee's requisite service period or the nonemployee's vesting period begins. The service inception date usually is the grant date, but the service inception date may differ from the grant date (see Example 6 [see paragraph 718-10-55-107] for an illustration of the application of this term to an employee award).") and [grant date](https://asc.understandingaccounting.org/glossary/g/#grant-date "The date at which a grantor and a grantee reach a mutual understanding of the key terms and conditions of a share-based payment award. The grantor becomes contingently obligated on the grant date to issue equity instruments or transfer assets to a grantee who delivers goods or renders services or purchases goods or services as a customer. Awards made under an arrangement that is subject to shareholder approval are not deemed to be granted until that approval is obtained unless approval is essentially a formality (or perfunctory), for example, if management and the members of the board of directors control enough votes to approve the arrangement. Similarly, individual awards that are subject to approval by the board of directors, management, or both are not deemed to be granted until all such approvals are obtained. The grant date for an award of equity instruments is the date that a grantee begins to benefit from, or be adversely affected by, subsequent changes in the price of the grantor's equity shares. Paragraph 718-10-25-5 provides guidance on determining the grant date. See Service Inception Date."). The service inception date is the date at which the requisite service period begins. The service inception date usually is the grant date, but the service inception date precedes the grant date if all of the following criteria are met: 1. a An award is authorized. (Compensation cost would not be recognized before receiving all necessary approvals unless approval is essentially a formality \[or perfunctory\].) 2. b Service begins before a mutual understanding of the key terms and conditions of a share-based payment award is reached. 3. c Either of the following conditions applies: 1. 1 The award's terms do not include a substantive future requisite service condition that exists at the grant date (see paragraph [718-10-55-113](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-113) for an example illustrating that condition). 2. 2 The award contains a market or performance condition that if not satisfied during the service period preceding the grant date and following the inception of the arrangement results in forfeiture of the award (see paragraph [718-10-55-114](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-114) for an example illustrating that condition). ##### [718-10-55-109](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-109) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:247d3c5989fbb38c3449440a5c0da7d98c9b96eefc9e9bf4b8b7c28c6c69e44a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In certain circumstances the service inception date may begin after the grant date (see paragraphs [718-10-55-93 through 55-94](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-93) for an example illustrating that circumstance). ##### [718-10-55-110](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-110) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:2410a0fc88484ef427af023f78369d647ab278edeaeef2b6483ce23190072e27 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For example, Entity T offers a position to an individual on April 1, 20X5, that has been approved by the chief executive officer and board of directors. In addition to salary and other benefits, Entity T offers to grant 10,000 shares of Entity T stock that vest upon the completion of 5 years of service (the market price of Entity T's stock is $25 on April 1, 20X5). The share award will begin vesting on the date the offer is accepted. The individual accepts the offer on April 2, 20X5, but is unable to begin providing services to Entity T until June 2, 20X5 (that is, substantive employment begins on June 2, 20X5). The individual also does not receive a salary or participate in other employee benefits until June 2, 20X5. On June 2, 20X5, the market price of Entity T stock is $40. In this Example, the service inception date is June 2, 20X5, the first date that the individual begins providing substantive employee services to Entity T. The grant date is the same date because that is when the individual would meet the definition of an employee. The grant-date fair value of the share award is $400,000 (10,000 × $40). ##### [718-10-55-111](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-111) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:fe2aedd6c210754c4d31efa8e7c992e623d1e82c89a8b26ee70249d3ab59f36e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If necessary board approval of the award described in the preceding paragraph was obtained on August 5, 20X5, two months after substantive employment begins (June 2, 20X5), both the service inception date and the grant date would be August 5, 20X5, as that is the date when all necessary authorizations were obtained. If the market price of Entity T's stock was $38 per share on August 5, 20X5, the grant-date fair value of the share award would be $380,000 (10,000 × $38). Additionally, Entity T would not recognize compensation cost for the shares for the period between June 2, 20X5, and August 4, 20X5, neither during that period nor cumulatively on August 5, 20X5, when both the service inception date and the grant date occur. This is consistent with the definition of requisite service period, which states that if an award requires future service for vesting, the entity cannot define a prior period as the requisite service period. Future service in this context represents the service to be rendered beginning as of the service inception date. ##### [718-10-55-112](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-112) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:516ea920f2d058e389fba26a05232509ddd4fdf6fc105f48fe8c397f54356b28 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the service inception date precedes the grant date, recognition of compensation cost for periods before the grant date shall be based on the fair value of the award at the reporting dates that occur before the grant date. In the period in which the grant date occurs, cumulative compensation cost shall be adjusted to reflect the cumulative effect of measuring compensation cost based on the fair value at the grant date rather than the fair value previously used at the service inception date (or any subsequent reporting dates) (see paragraph [718-10-35-6](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-6)). ##### [718-10-55-113](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-113) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:2b84b398b78b99570553191c4ac13b7cd1a375c33afbfe18494fa9b325bc6891 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If an award's terms do not include a substantive future requisite service condition that exists at the grant date, the service inception date can precede the grant date. For example, on January 1, 20X5, an employee is informed that an award of 100 fully vested options will be made on January 1, 20X6, with an exercise price equal to the share price on January 1, 20X6. All approvals for that award have been obtained as of January 1, 20X5. That individual is still an employee on January 1, 20X6, and receives the 100 fully vested options on that date. There is no substantive future service period associated with the options after January 1, 20X6. Therefore, the requisite service period is from the January 1, 20X5, service inception date through the January 1, 20X6, grant date, as that is the period during which the employee is required to perform service in exchange for the award. The relationship between the exercise price and the current share price that provides a sufficient basis to understand the equity relationship established by the award is known on January 1, 20X6. Compensation cost would be recognized during 20X5 in accordance with the preceding paragraph. ##### [718-10-55-114](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-114) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:7da9fb0cc4f0276a0faa6300da55790df02e988902ffe38d10043969f8aff0b8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If an award contains either a market or a performance condition, which if not satisfied during the service period preceding the grant date and following the date the award is given results in a forfeiture of the award, then the service inception date may precede the grant date. For example, an authorized award is given on January 1, 20X5, with a two-year cliff vesting service requirement commencing on that date. The exercise price will be set on January 1, 20X6. The award will be forfeited if Entity T does not sell 1,000 units of product X in 20X5. In this Example, the employee earns the right to retain the award if the performance condition is met and the employee renders service in 20X5 and 20X6. The requisite service period is two years beginning on January 1, 20X5. The service inception date (January 1, 20X5) precedes the grant date (January 1, 20X6). Compensation cost would be recognized during 20X5 in accordance with paragraph [718-10-55-112](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-112). ##### [718-10-55-115](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-115) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:b1d8e0308bca9b5d6750116f74f0b131cb1b7f972209dbf5dbc4999c569e7cf3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In contrast, consider an award that is given on January 1, 20X5, with only a three-year cliff vesting explicit service condition, which commences on that date. The exercise price will be set on January 1, 20X6. In this Example, the service inception date cannot precede the grant date because there is a substantive future requisite service condition that exists at the grant date (two years of service). Therefore, there would be no attribution of compensation cost for the period between January 1, 20X5, and December 31, 20X5, neither during that period nor cumulatively on January 1, 20X6, when both the service inception date and the grant date occur. This is consistent with the definition of requisite service period, which states that if an award requires future service for vesting, the entity cannot define a prior period as the requisite service period. The requisite service period would be two years, commencing on January 1, 20X6. ##### [718-10-55-116](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-116) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:72f922d40c26efb4855441227e02a540cfafc8c9d2b969cd2d503449dd49ae06 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A [tandem award](https://asc.understandingaccounting.org/glossary/t/#tandem-award "An award with two or more components in which exercise of one part cancels the other(s).") is an award with two or more components in which exercise of one part cancels the other(s). In contrast, a [combination award](https://asc.understandingaccounting.org/glossary/c/#combination-award "An award with two or more separate components, each of which can be separately exercised. Each component of the award is actually a separate award, and compensation cost is measured and recognized for each component.") is an award with two or more separate components, all of which can be exercised. The following Cases illustrates one aspect of the guidance in paragraph [718-10-25-15](https://asc.understandingaccounting.org/asc/718/10/#718-10-25-15): 1. a Share option or cash settled stock appreciation rights (Case A) 2. b Phantom shares or share options (Case B). ##### [718-10-55-116A](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-116A) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:7bc46ec3d9f96872f6ccc3daf8dd84f2eb04f4f2000f72be235f57f06fb14773 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Cases A and B of this Example (see paragraphs [718-10-55-117 through 55-130](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-117) ) describe employee awards. However, the principles on accounting for employee awards, except for compensation cost attribution, are the same for nonemployee awards. Therefore, the guidance in these Cases may serve as implementation guidance for nonemployee awards. ##### [718-10-55-116B](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-116B) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:fd45a7341db0caef72f4f251f15566977d2e0d13492c667d1638dd9e66855e00 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Compensation cost attribution for awards to nonemployees may be the same as or different from the attribution for the employee awards in Case A (see paragraph [718-10-55-119](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-119)) and Case B (see paragraph [718-10-55-130](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-130)). That is because an entity is required to recognize compensation cost for nonemployee awards in the same manner as if the entity had paid cash in accordance with paragraph [718-10-25-2C](https://asc.understandingaccounting.org/asc/718/10/#718-10-25-2C). Additionally, valuation amounts used in the Cases could be different because an entity may elect to use the contractual term as the expected term of share options and similar instruments when valuing nonemployee share-based transactions. ##### [718-10-55-117](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-117) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:bb7ff91a132cfb4a2244b81448b84e46440dae8da21712df467c15e2f78f90a7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case illustrates the accounting for a tandem award in which employees have a choice of either share options or cash-settled stock appreciation rights. Entity T grants to its employees an award of 900,000 share options or 900,000 cash-settled stock appreciation rights on January 1, 20X5. The award vests on December 31, 20X7, and has a contractual life of 10 years. If an employee exercises the stock appreciation rights, the related share options are cancelled. Conversely, if an employee exercises the share options, the related stock appreciation rights are cancelled. ##### [718-10-55-118](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-118) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:7db7e3a8c1c3a5ccdea3fca184be5645a26c9462b4d40fa76dfc6893b61d155e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The tandem award results in Entity T's incurring a liability because the employees can demand settlement in cash. If Entity T could choose whether to settle the award in cash or by issuing stock, the award would be an equity instrument unless Entity T's predominant past practice is to settle most awards in cash or to settle awards in cash whenever requested to do so by the employee, indicating that Entity T has incurred a substantive liability as indicated in paragraph [718-10-25-15](https://asc.understandingaccounting.org/asc/718/10/#718-10-25-15). In this Case, however, Entity T incurs a liability to pay cash, which it will recognize over the requisite service period. The amount of the liability will be adjusted each year to reflect changes in its fair value. If employees choose to exercise the share options rather than the stock appreciation rights, the liability is settled by issuing stock. ##### [718-10-55-119](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-119) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:4ee1a797796979be166d35e0428a2174d00cbdad6464bd367e96203a9f8a05da Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The fair value of the stock appreciation rights at the grant date is $12,066,454, as computed in Example 1 (see paragraph [718-30-55-1](https://asc.understandingaccounting.org/asc/718/30/#718-30-55-1)), because the value of the stock appreciation rights and the value of the share options are equal. Accordingly, at the end of 20X5, when the assumed fair value per stock appreciation right is $10, the amount of the liability is $8,214,060 (821,406 cash-settled stock appreciation rights expected to vest × $10). One-third of that amount, $2,738,020, is recognized as compensation cost for 20X5. At the end of each year during the vesting period, the liability is remeasured to its fair value for all stock appreciation rights expected to vest. After the vesting period, the liability for all outstanding vested awards is remeasured through the date of settlement. ##### [718-10-55-120](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-120) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:c3cb99649f9ce417ead062246c1bd0c1986ba95686238563aa853f15d3bd3418 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case illustrates a tandem award in which the components have different values after the grant date, depending on movements in the price of the entity's stock. The employee's choice of which component to exercise will depend on the relative values of the components when the award is exercised. ##### [718-10-55-121](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-121) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:158727c7128f8c4eb6dd64b43431865c9245621e4aeae2048789ce4bb550c43c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity T grants to its chief executive officer an immediately vested award consisting of the following two parts: 1. a 1,000 phantom share units (units) whose value is always equal to the value of 1,000 shares of Entity T's common stock 2. b Share options on 3,000 shares of Entity T's stock with an exercise price of $30 per share. ##### [718-10-55-122](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-122) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:23f690f91ba7c73bb9f42ffafa4936823401d2066ec54d123bc0bacbf1b21e88 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. At the grant date, Entity T's share price is $30 per share. The chief executive officer may choose whether to exercise the share options or to cash in the units at any time during the next five years. Exercise of all of the share options cancels all of the units, and cashing in all of the units cancels all of the share options. The cash value of the units will be paid to the chief executive officer at the end of five years if the share option component of the tandem award is not exercised before then. ##### [718-10-55-123](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-123) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:bc918d0ed65836cc0b4ba3cf23dadaa6994dcf7b104c6f6560d25db2c3e1c55e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. With a 3-to-1 ratio of share options to units, exercise of 3 share options will produce a higher gain than receipt of cash equal to the value of 1 share of stock if the share price appreciates from the grant date by more than 50 percent. Below that point, one unit is more valuable than the gain on three share options. To illustrate that relationship, the results if the share price increases 50 percent to $45 are as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-EEFDE090-F459-416F-8C83-5CE53F1084C5-low.gif) Units Exercise of Options Market value " $45,000 " "($45 × 1,000)" " $135,000 " " ($45 × 3,000)" Purchase price - " 90,000 " " ($30 × 3,000)" Net cash value " $45,000 " " $45,000 " ##### [718-10-55-124](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-124) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:f69f5e936dcd3b7bdf3eb08acd9ce5a601dd5af53c3fe4e7114655fed1ba0d1d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the price of Entity T's common stock increases to $45 per share from its price of $30 at the grant date, each part of the tandem grant will produce the same net cash payment (ignoring transaction costs) to the chief executive officer. If the price increases to $44, the value of 1 share of stock exceeds the gain on exercising 3 share options, which would be $42 \[3 × ($44-$30)\]. But if the price increases to $46, the gain on exercising 3 share options, $48 \[3 × ($46-$30)\], exceeds the value of 1 share of stock. ##### [718-10-55-125](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-125) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:53e80fe5fbe97833854aabb808fe48563b8ddab11880132657b9710eeffee504 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. At the grant date, the chief executive officer could take $30,000 cash for the units and forfeit the share options. Therefore, the total value of the award at the grant date must exceed $30,000 because at share prices above $45, the chief executive officer receives a higher amount than would the holder of 1 share of stock. To exercise the 3,000 options, the chief executive officer must forfeit the equivalent of 1,000 shares of stock, in addition to paying the total exercise price of $90,000 (3,000 × $30). In effect, the chief executive officer receives only 2,000 shares of Entity T stock upon exercise. That is the same as if the share option component of the tandem award consisted of share options to purchase 2,000 shares of stock for $45 per share. ##### [718-10-55-126](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-126) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:74c1f2c38d83f681e06f92686599749d709988e652adf29ffeec5502ecdbcda6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The cash payment obligation associated with the units qualifies the award as a liability of Entity T. The maximum amount of that liability, which is indexed to the price of Entity T's common stock, is $45,000 because at share prices above $45, the chief executive officer will exercise the share options. ##### [718-10-55-127](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-127) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:fa76d4ae8de7cfeca3d42374c80f292614cc4a87f03e70bbe7a6ca1f2c3d009d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In measuring compensation cost, the award may be thought of as a combination —not tandem—grant of both of the following: 1. a 1,000 units with a value at grant of $30,000 2. b 2,000 options with a strike price of $45 per share. ##### [718-10-55-128](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-128) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:e58f2eec2a080ead568dbc7075a970cf8037a12c2ce9e3398db1f71378b66d1e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Compensation cost is measured based on the combined value of the two parts. ##### [718-10-55-129](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-129) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:2a990848a6bbab5871fceab6fa9d28f3ca7ba18a9efa1e2d89d2c94e80f7d80b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The fair value per share option with an exercise price of $45 is assumed to be $10. Therefore, the total value of the award at the grant date is as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-404C0824-13F0-4124-973B-EAF6991A370F-low.gif) "Units (1,000 × $30)" " $30,000 " "Share options (2,000 × $10)" " 20,000 " Value of award " $50,000 " ##### [718-10-55-130](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-130) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:a3a97559569e7a158f15f0f2032f04b0ac7cf7d3342c4d024c3677b5e5da4b5a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Therefore, compensation cost recognized at the date of grant (the award is immediately vested) would be $30,000 with a corresponding credit to a share-based compensation liability of $30,000. However, because the share option component is the substantive equivalent of 2,000 deep out-of-the-money options, it contains a derived service period (assumed to be 2 years). Hence, compensation cost for the share option component of $20,000 would be recognized over the requisite service period. The share option component would not be remeasured because it is not a liability. That total amount of both components (or $50,000) is more than either of the components by itself, but less than the total amount if both components (1,000 units and 3,000 share options with an exercise price of $30) were exercisable. Because granting the units creates a liability, changes in the liability that result from increases or decreases in the price of Entity T's share price would be recognized each period until exercise, except that the amount of the liability would not exceed $45,000. ##### [718-10-55-131](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-131) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:0ecb83b2c8db9ec8cbf36db546c3bb55c339c8950e08de0c612551b0120df54d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A nonpublic entity that is not a Securities and Exchange Commission (SEC) registrant has two classes of stock. Class A is voting and held only by the members of the founding family, and Class B (book value shares) is nonvoting and held only by employees. The purchase price of Class B shares is a formula price based on book value. Class B shares require that the employee, six months after retirement or separation from the entity, sell the shares back to the entity for cash at a price determined by using the same formula used to establish the purchase price. Class B shares may not be required to be accounted for as liabilities pursuant to Topic 480 because the entity is a nonpublic entity that is not an SEC registrant. Nevertheless, Class B shares may be classified as liabilities if they are granted as part of a share-based payment transaction and those shares contain certain repurchase features meeting criteria in paragraph [718-10-25-9](https://asc.understandingaccounting.org/asc/718/10/#718-10-25-9); this Example assumes that Class B shares do not meet those criteria. Because book value shares of public entities generally are not indexed to their stock prices, such shares would be classified as liabilities pursuant to this Topic. ##### [718-10-55-132](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-132) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:5036a4ec1b369a7838e83937a200bea26d4501ab325255adae5bee770abde5d0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Determining whether a transaction involving Class B shares is compensatory will depend on the terms of the arrangement. For instance, if an employee acquires 100 shares of Class B stock in exchange for cash equal to the formula price of those shares, the transaction is not compensatory because the employee has acquired those shares on the same terms available to all other Class B shareholders and at the current formula price based on the current book value. Subsequent changes in the formula price of those shares held by the employee are not deemed compensation for services. ##### [718-10-55-133](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-133) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:4fe46ad638a4f3afba0fe3dc7f89fd5b8318c15f51b0a07e2f9e2d17cb211d10 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. However, if an employee acquires 100 shares of Class B stock in exchange for cash equal to 50 percent of the formula price of those shares, the transaction is compensatory because the employee is not paying the current formula price. Therefore, the value of the 50 percent discount should be attributed over the requisite service period. However, subsequent changes in the formula price of those shares held by the employee are not compensatory. ##### [718-10-55-134](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-134) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:cc8f604c1012cb2038ed937002989176b3493f1f95d529a9dcfc9694609247cd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates disclosures (see paragraphs [718-10-50-1 through 50-2](https://asc.understandingaccounting.org/asc/718/10/#718-10-50-1) ) of a public entity's share-based compensation arrangements. The illustration assumes that compensation cost has been recognized in accordance with this Topic for several years. The amount of compensation cost recognized each year includes both costs from that year's grants and costs from prior years' grants. The number of options outstanding, exercised, forfeited, or expired each year includes options granted in prior years. Although this Example focuses on employee share-based payment plans, the disclosures are equally applicable to share-based payment awards issued to nonemployees. An entity should refer to the guidance in paragraph [718-10-50-2(g)](https://asc.understandingaccounting.org/asc/718/10/#718-10-50-2) when evaluating whether separate disclosure of nonemployee share-based payment awards is warranted. ##### [718-10-55-135](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-135) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:fe66a55717876ed02b00c6c7396f7cc30717bcca47a940a229e1b318c165bef4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. On December 31, 20Y1, the Entity has two share-based compensation plans: The compensation cost that has been charged against income for those plans was $29.4 million, $28.7 million, and $23.3 million for 20Y1, 20Y0, and 20X9, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $10.3 million, $10.1 million, and $8.2 million for 20Y1, 20Y0, and 20X9, respectively. Compensation cost capitalized as part of inventory and fixed assets for 20Y1, 20Y0, and 20X9 was $0.5 million, $0.2 million, and $0.4 million, respectively. ##### [718-10-55-136](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-136) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:ce39f12c47e713e5f36a4a2f8784150c3f735204e0c08c7bd49e26dad9be3a50 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following illustrates disclosure for a share option plan. - The Entity's 20X4 employee share option plan, which is shareholder-approved, permits the grant of share options and shares to its employees for up to 8 million shares of common stock. Entity A believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of Entity A's stock at the date of grant; those option awards generally vest based on 5 years of continuous service and have 10-year contractual terms. Share awards generally vest over five years. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the employee share option plan). - The fair value of each option award is estimated on the date of grant using a lattice-based option valuation model that uses the assumptions noted in the following table. Because lattice-based option valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on implied volatilities from traded options on Entity A's stock, historical volatility of Entity A's stock, and other factors. Entity A uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. - ![](https://asc.understandingaccounting.org/asc-img/GUID-57931370-5913-4498-ADDA-672B3CBBF0EF-low.gif) 20Y1 20Y0 20X9 Expected volatility 25%-40% 24%-38% 20%-30% Weighted-average volatility 33% 30% 27% Expected dividends 1.5% 1.5% 1.5% Expected term (in years) 5.3-7.8 5.5-8.0 5.6-8.2 Risk-free rate 6.3%-11.2% 6.0%-10.0% 5.5%-9.0% - A summary of option activity under the employee share option plan as of December 31, 20Y1, and changes during the year then ended is presented below. - ![](https://asc.understandingaccounting.org/asc-img/GUID-68329FCF-C045-4CFC-A06D-8B848A5BD25B-low.gif) Options Shares (000) Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term Aggregate Intrinsic Value ($000) "Outstanding at January 1, 20Y1" " 4,660 " $42 Granted 950 60 Exercised (800) 36 Forfeited or expired (80) 59 "Outstanding at December 31, 20Y1" " 4,730 " $47 6.5 " $85,140 " "Exercisable at December 31, 20Y1" " 3,159 " $41 4.0 " $75,816 " - The weighted-average grant-date fair value of options granted during the years 20Y1, 20Y0, and 20X9 was $19.57, $17.46, and $15.90, respectively. The total intrinsic value of options exercised during the years ended December 31, 20Y1, 20Y0, and 20X9, was $25.2 million, $20.9 million, and $18.1 million, respectively. - A summary of the status of Entity A's nonvested shares as of December 31, 20Y1, and changes during the year ended December 31, 20Y1, is presented below. - ![](https://asc.understandingaccounting.org/asc-img/GUID-2BAC01FE-888E-4BD9-A71C-442FE954D512-low.gif) Nonvested Shares Shares (000) "Weighted-Average Grant-Date Fair Value" "Nonvested at January 1, 20Y1" 980 $40.00 Granted 150 63.50 Vested (100) 35.75 Forfeited (40) 55.25 "Nonvested at December 31, 20Y1" 990 $43.35 - As of December 31, 20Y1, there was $25.9 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the employee share option plan. That cost is expected to be recognized over a weighted-average period of 4.9 years. The total fair value of shares vested during the years ended December 31, 20Y1, 20Y0, and 20X9, was $22.8 million, $21 million, and $20.7 million, respectively. - During 20Y1, Entity A extended the contractual life of 200,000 fully vested share options held by 10 employees. As a result of that modification, the Entity recognized additional compensation expense of $1.0 million for the year ended December 31, 20Y1. ##### [718-10-55-137](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-137) Pending content: no Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:ff7123d791f9aa36ebbcc08c66d1871ae76632e70f05b4ed7c672a360c167410 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following illustrates disclosure for a performance share option plan. - Under its 20X7 performance share option plan, which is shareholder-approved, each January 1 Entity A grants selected executives and other key employees share option awards whose vesting is contingent upon meeting various departmental and company-wide performance goals, including decreasing time to market for new products, revenue growth in excess of an index of competitors' revenue growth, and sales targets for Segment X. Share options under the performance share option plan are generally granted at-the-money, contingently vest over a period of 1 to 5 years, depending on the nature of the performance goal, and have contractual lives of 7 to 10 years. The number of shares subject to options available for issuance under this plan cannot exceed 5 million. - The fair value of each option grant under the performance share option plan was estimated on the date of grant using the same option valuation model used for options granted under the employee share option plan and assumes that performance goals will be achieved. If such goals are not met, no compensation cost is recognized and any recognized compensation cost is reversed. The inputs for expected volatility, expected dividends, and risk-free rate used in estimating those options' fair value are the same as those noted in the table related to options issued under the employee share option plan. The expected term for options granted under the performance share option plan in 20Y1, 20Y0, and 20X9 is 3.3 to 5.4 years, 2.4 to 6.5 years, and 2.5 to 5.3 years, respectively. - A summary of the activity under the performance share option plan as of December 31, 20Y1, and changes during the year then ended is presented below. - ![](https://asc.understandingaccounting.org/asc-img/GUID-E7DCBC25-CE99-4A36-868A-190D098490BD-low.gif) Performance Options Shares (000) Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term Aggregate Intrinsic Value ($000) "Outstanding at January 1, 20Y1" "2,533 " $44 Granted 995 60 Exercised (100) 36 Forfeited (604) 59 "Outstanding at December 31, 20Y1" "2,824 " $47 7.1 " $50,832 " "Exercisable at December 31, 20Y1" 936 $40 5.3 " $23,400 " - The weighted-average grant-date fair value of options granted during the years 20Y1, 20Y0, and 20X9 was $17.32, $16.05, and $14.25, respectively. The total intrinsic value of options exercised during the years ended December 31, 20Y1, 20Y0, and 20X9, was $5 million, $8 million, and $3 million, respectively. As of December 31, 20Y1, there was $16.9 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the performance share option plan; that cost is expected to be recognized over a period of 4 years. - Cash received from option exercise under all share-based payment arrangements for the years ended December 31, 20Y1, 20Y0, and 20X9, was $32.4 million, $28.9 million, and $18.9 million, respectively. The actual tax benefit for the tax deductions from option exercise of the share-based payment arrangements totaled $11.3 million, $10.1 million, and $6.6 million, respectively, for the years ended December 31, 20Y1, 20Y0, and 20X9. - Entity A has a policy of repurchasing shares on the open market to satisfy share option exercises and expects to repurchase approximately 1 million shares during 20Y2, based on estimates of option exercises for that period. ##### [718-10-55-138](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-138) Pending content: yes Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:cca5ee6468a83edac5917d4e1dd2d4cacf70b46caeb89b56b1f2c2fea6db57c3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [718-10-65-17](https://asc.understandingaccounting.org/asc/718/10/#718-10-65-17)This Example illustrates how an entity should apply the guidance in paragraph [718-10-15-3](https://asc.understandingaccounting.org/asc/718/10/#718-10-15-3) to determine whether a profits interest or similar award is a share-based payment arrangement and is within the scope of this Topic or is not a share-based payment arrangement and, therefore, is within the scope of other Topics. The guidance in this Example is limited to the application of paragraph [718-10-15-3](https://asc.understandingaccounting.org/asc/718/10/#718-10-15-3) and does not address how to apply other Sections of this Topic, including recognition, classification, initial measurement, subsequent measurement, other presentation matters, and disclosure. ##### [718-10-55-139](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-139) Pending content: yes Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:119ffafa00b6f8bfbe65839859d302d244a94b9f06263ddae80cb4c1a0a03b23 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [718-10-65-17](https://asc.understandingaccounting.org/asc/718/10/#718-10-65-17)Cases A, B, C, and D share the following assumptions: 1. a Entity X is a partnership. Before June 1, 20X1, Entity X had Class A units outstanding. On June 1, 20X1, Entity X grants Class B incentive units to employees of a subsidiary of Entity X in exchange for services. 2. b An exit event may include an initial public offering, a change in control, or a liquidation of Entity X's assets. ##### [718-10-55-140](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-140) Pending content: yes Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:3c23d7c6b456b176625b2e1dac5621b98d715035cb8360d058bd7d0a08f650e9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [718-10-65-17](https://asc.understandingaccounting.org/asc/718/10/#718-10-65-17)Additional assumptions are as follows: 1. a The Class B units are profits interest units that are subordinated to the Class A units because after vesting they participate pro rata with the Class A units once the holders of the Class A units have received distributions equal to a predetermined distribution threshold established on the grant date of the Class B units. 2. b The Class B units cliff vest at the end of three years of service. 3. c Upon an exit event, the Class B units vest immediately if a grantee is still providing services to the subsidiary of Entity X. Upon such an event, the grantee would retain the vested Class B units, or if Class B units are settled through the exit event, Entity X would distribute proceeds to the Class B unit holders in the same manner as is described in (a). 4. d If a grantee of the Class B units terminates employment with the subsidiary of Entity X (whether voluntarily, upon death, disability, or retirement or at the election of Entity X for reasons other than cause), any unvested Class B units will be forfeited for no consideration. If a grantee of the Class B units terminates employment after vesting, the grantee retains ownership of the vested Class B units, but upon the grantee’s termination of employment, Entity X has a call right to repurchase the Class B units. If the call right is exercised, Entity X would pay the grantee of the Class B units an amount of cash equal to the fair value of the Class B units on the call date. ##### [718-10-55-141](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-141) Pending content: yes Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:f4b90f726ff6acd220c7cb5fae2969071434b601bc32dee581f4196273fcf054 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [718-10-65-17](https://asc.understandingaccounting.org/asc/718/10/#718-10-65-17)Entity X evaluates the conditions in paragraph [718-10-15-3](https://asc.understandingaccounting.org/asc/718/10/#718-10-15-3) to determine whether to account for the Class B units by applying the guidance in this Topic. The Class B units meet the condition in paragraph [718-10-15-3(a)](https://asc.understandingaccounting.org/asc/718/10/#718-10-15-3) because both of the following indicate that Entity X is offering to issue shares or other equity instruments: 1. a Either upon three years of service or an exit event, the grantor will have received the agreed-upon consideration (that is, the service will have been provided and the performance condition will have been met, if applicable) and the award will vest. 2. b Holding the vested Class B units provides the grantee with the right to participate in the residual interest of Entity X through periodic distributions, upon an exit event, or upon settlement proportionate to ownership of Class B units of Entity X in accordance with the distribution waterfall described in paragraph [718-10-55-140(a)](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-140). Therefore, Entity X would account for the Class B units by applying the guidance in this Topic. ##### [718-10-55-142](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-142) Pending content: yes Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:143f89adaa8692e369fe35202b2f3c17454757b81674d08f48ffd2c1351d5b73 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [718-10-65-17](https://asc.understandingaccounting.org/asc/718/10/#718-10-65-17)Additional assumptions are as follows: 1. a The Class B units are profits interest units that are subordinated to the Class A units because once granted, they participate pro rata with the Class A units once the holders of the Class A units have received distributions equal to a predetermined distribution threshold established on the grant date of the Class B units. 2. b The grantee of the Class B units is eligible to begin participating in nonforfeitable operating distributions at the grant date. 3. c The Class B units only vest upon an exit event. Upon such an event, the grantee would retain the vested Class B units, or if Class B units are settled through the exit event, Entity X would distribute proceeds to the Class B unit holders in the same manner as is described in (a). Class B units are forfeitable upon the grantee’s termination for any reason at any time before an exit event. ##### [718-10-55-143](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-143) Pending content: yes Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:3e8948fa8943ca63395c5a2175ba54f374be816623faa1640cc07dcf8eced4fb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [718-10-65-17](https://asc.understandingaccounting.org/asc/718/10/#718-10-65-17)Entity X evaluates the conditions in paragraph [718-10-15-3](https://asc.understandingaccounting.org/asc/718/10/#718-10-15-3) to determine whether to account for the Class B units by applying the guidance in this Topic. The Class B units meet the condition in paragraph [718-10-15-3(a)](https://asc.understandingaccounting.org/asc/718/10/#718-10-15-3) because both of the following indicate that Entity X is offering to issue shares or other equity instruments: 1. a Upon an exit event, the grantor will have received the agreed-upon consideration (that is, the service will have been provided and the performance condition will have been met) and the award will vest. 2. b Holding the vested Class B units provides the grantee with the right to participate in the residual interest of Entity X through periodic distributions, upon an exit event, or upon settlement proportionate to ownership of Class B units of Entity X in accordance with the distribution waterfall described in paragraph [718-10-55-142(a)](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-142). Therefore, Entity X would account for the Class B units by applying the guidance in this Topic. ##### [718-10-55-144](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-144) Pending content: yes Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:5f40984970e01e86205f64d05ad3c419e5a588198f7d77570dcb53a0cf503639 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [718-10-65-17](https://asc.understandingaccounting.org/asc/718/10/#718-10-65-17)The grantee of the Class B units is not entitled to retain the units if the grantee ceases to provide services before an exit event. Upon termination of employment before an exit event, the grantee of the Class B units would forfeit all rights to future distributions and would forfeit Class B units for no consideration. Entity X would account for the grantee’s right to participate in nonforfeitable operating distributions in accordance with paragraph [718-10-55-45](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-45). ##### [718-10-55-145](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-145) Pending content: yes Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:7bdd1a6c420b2a2ec7aea0e148648f7f58a617a1d468ef7fb4ab2ec59c11bebc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [718-10-65-17](https://asc.understandingaccounting.org/asc/718/10/#718-10-65-17)Additional assumptions are as follows: 1. a The Class B units do not entitle the grantee to receive equity instruments of Entity X. This type of unit is often referred to as a phantom share unit. 2. b The grantee of the Class B units is not eligible to participate in distributions in the ordinary course of business. 3. c The grantee of the Class B units is eligible to receive cash upon an exit event. Upon an exit event, the Class B units vest immediately and must be settled in cash on the basis of the fair value of the Class B units. The fair value of the Class B units is calculated by reference to the price of Class A units of Entity X as determined at the date of the exit event. 4. d The grantee of the Class B units must be providing services when the exit event occurs to receive any proceeds, and the Class B units are forfeitable upon the grantee’s termination for any reason at any time before an exit event. ##### [718-10-55-146](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-146) Pending content: yes Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:948c819f8ab7758c82a1d4f4d9452be48698e756139850a5e8985d2d2cbf1a24 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [718-10-65-17](https://asc.understandingaccounting.org/asc/718/10/#718-10-65-17)Entity X evaluates the conditions in paragraph [718-10-15-3](https://asc.understandingaccounting.org/asc/718/10/#718-10-15-3) to determine whether to account for the Class B units by applying the guidance in this Topic. The Class B units do not meet the condition in paragraph [718-10-15-3(a)](https://asc.understandingaccounting.org/asc/718/10/#718-10-15-3) because they do not entitle the grantee to receive shares or other equity instruments of Entity X; therefore, Entity X is not issuing, or offering to issue, shares, share options, or other equity instruments. However, the condition in paragraph [718-10-15-3(b)(1)](https://asc.understandingaccounting.org/asc/718/10/#718-10-15-3) is met because the cash proceeds received by the grantee upon settlement in an exit event are based, at least in part, on the price of Entity X’s shares. Therefore, Entity X would account for the Class B units by applying the guidance in this Topic. ##### [718-10-55-147](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-147) Pending content: yes Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:1086e08bb223543744277119f28582257a3cb2ac76f19e26944a05df23b7e413 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [718-10-65-17](https://asc.understandingaccounting.org/asc/718/10/#718-10-65-17)Additional assumptions are as follows: 1. a The Class B units do not entitle the grantee to receive equity instruments of Entity X. This type of unit is often referred to as a phantom share unit. 2. b The grantee of the Class B units is eligible to participate in operating distributions made by Entity X equal to 1 percent of the preceding fiscal year’s net income. The grantee of the Class B units is eligible to begin participating in these operating distributions after three years of service. 3. c The grantee of the Class B units is not eligible to participate in any proceeds distributed upon an exit event. 4. d The Class B units are forfeitable upon the grantee’s termination for any reason at any time (including after the grantee has rendered three years of service). ##### [718-10-55-148](https://asc.understandingaccounting.org/asc/718/10/#718-10-55-148) Pending content: yes Source downloaded (UTC): 2026-09-10T01:03:50.265Z to 2026-09-10T01:03:50.265Z Record version: sha256:2df362ae8c7aef6c71cbcd58f670740351bb7629fc7ed0d59d58a389af46154f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [718-10-65-17](https://asc.understandingaccounting.org/asc/718/10/#718-10-65-17)Entity X evaluates the conditions in paragraph [718-10-15-3](https://asc.understandingaccounting.org/asc/718/10/#718-10-15-3) to determine whether to account for the Class B units by applying the guidance in this Topic. The Class B units do not meet the condition in paragraph [718-10-15-3(a)](https://asc.understandingaccounting.org/asc/718/10/#718-10-15-3) because they do not entitle the grantee to receive shares or other equity instruments of Entity X; therefore, Entity X is not issuing or offering to issue shares, share options, or other equity instruments. In addition, the condition in paragraph [718-10-15-3(b)(1)](https://asc.understandingaccounting.org/asc/718/10/#718-10-15-3) is not met because the proceeds received by the grantee related to operating distributions are based on an operating metric (1 percent of the preceding fiscal year’s net income) of Entity X and are not based, at least in part, on the price of Entity X’s shares. Furthermore, the condition in paragraph [718-10-15-3(b)(2)](https://asc.understandingaccounting.org/asc/718/10/#718-10-15-3) is not met because there is no circumstance in which Entity X would be required to issue its equity shares or other equity instruments. Therefore, Entity X would not apply the guidance in this Topic to account for the Class B units and, instead, would account for the Class B units in accordance with other Topics.