Stock compensation

ASC 505-50 formerly governed the accounting for equity instruments (shares, options, warrants) issued to non-employees in exchange for goods or services, including measurement date, performance commitment, and counterparty-performance concepts. Every paragraph in the subtopic has been superseded — chiefly by ASU 2018-07 (Improvements to Nonemployee Share-Based Payment Accounting), with the share-based-payment-as-consideration-payable-to-a-customer paragraphs superseded earlier by ASU 2014-09 (Revenue from Contracts with Customers). As a result, the subtopic contains no operative guidance; nonemployee share-based payment awards are now accounted for under ASC 718.

ASC 718-10 is the "Overall" subtopic for share-based payment arrangements, setting the pervasive scope, recognition, measurement, classification, and disclosure principles that apply to both equity- and liability-classified awards granted to employees and nonemployees (and, by cross-reference, to customers). Its core rule is that cost must be recognized for all share-based payment transactions using a fair-value-based measurement method, generally grant-date fair value of the equity instruments issued (or fair value of liabilities incurred), recognized as the goods are obtained or services are received (718-10-10-2; 718-10-25-2; 718-10-30-3). Classification as liability or equity follows Topic 480 criteria as modified by 718-10-25-8 through 25-19A, and performance conditions are accrued based on the probable outcome while market conditions are reflected in grant-date fair value.

ASC 718-20 governs the subsequent measurement of share-based payment awards that are classified as equity (liability-classified awards go to 718-30, and general recognition/measurement rules stay in 718-10). Its core rules address awards whose grant-date fair value cannot be reasonably estimated (intrinsic value remeasurement through settlement), clawback and other contingent features (accounted for only when the contingent event occurs), and — most importantly — modification accounting, under which a modification is treated as an exchange of the original award for a new one, with incremental cost measured as the excess of the modified award's fair value over the original award's fair value immediately before modification. It also covers repurchases, cancellations, and cancellation-and-replacement transactions.

ASC 718-30 governs share-based payment awards that are classified as liabilities rather than equity (e.g., cash-settled stock appreciation rights). Liability awards use the same grant-date measurement objective as equity awards, but the measurement date is the settlement date, so the liability is remeasured at fair value (or intrinsic value if a nonpublic entity so elects) at every reporting date through settlement. Changes in value during the requisite service (or nonemployee vesting) period are recognized as compensation cost in proportion to service rendered; changes after that period are expensed immediately in the period of change.

ASC 718-40 governs the employer's (sponsor's) accounting for employee stock ownership plans (ESOPs), distinguishing leveraged from nonleveraged plans. For leveraged ESOPs, the employer records the ESOP's outside debt as its own debt, charges shares issued to the ESOP to a contra-equity account ("unearned ESOP shares"), and recognizes compensation cost at the fair value of shares as they are committed to be released; for nonleveraged ESOPs, compensation cost equals the contribution called for in the period. It also prescribes dividend treatment (allocated shares to retained earnings; unallocated shares as debt reduction or compensation cost), EPS treatment, termination accounting, and disclosures.

ASC 718-50 governs employee share purchase plans (ESPPs), including Section 423-style plans. Its core rule is a three-part test in 718-50-25-1: a plan is noncompensatory only if (a) its terms are no more favorable than those available to all holders of the same class of shares or the discount does not exceed the per-share cost of raising capital publicly (a 5% or smaller discount is automatically acceptable), (b) substantially all employees meeting limited employment qualifications may participate on an equitable basis, and (c) the plan has no option features other than two narrow exceptions. If the plan is compensatory (e.g., it has a look-back feature), grant-date fair value is measured by valuing the award as the sum of its separate components, and the requisite service period is the period over which the employee participates and pays for the shares.

ASC 718-740 governs the income tax accounting consequences of share-based payment arrangements, including employee stock ownership plans. Cumulative compensation cost recognized for awards that ordinarily generate a future tax deduction creates a deductible temporary difference and a deferred tax asset (718-740-25-2, 25-4), measured on book compensation cost rather than the shares' current fair value. When the actual tax deduction is finally determined (typically at exercise, expiration, or vesting), any difference between it and cumulative book compensation cost is recognized as income tax expense or benefit in the income statement (718-740-35-2).

ASC 805-30 covers the piece of the acquisition method that produces goodwill or a bargain purchase gain. Goodwill equals the excess of (a) consideration transferred at acquisition-date fair value plus the fair value of any noncontrolling interest plus the acquisition-date fair value of any previously held equity interest, over (b) the net of the acquisition-date amounts of identifiable assets acquired and liabilities assumed (805-30-30-1); if (b) exceeds (a), the acquirer must first reassess its identification and measurement of all items and then recognize the remaining excess as a gain in earnings. It also governs measurement of consideration transferred, including contingent consideration and share-based payment replacement awards.