5.3 Share Repurchase Features

ASC 718-10

25-9 Topic 480 does not apply to outstanding shares embodying a conditional obligation to transfer assets, for example, shares that give the grantee the right to require the grantor to repurchase them for cash equal to their fair value (puttable shares). A put right may be granted to the grantee in a transaction that is related to a share-based compensation arrangement. If exercise of such a put right would require the entity to repurchase shares issued under the share-based compensation arrangement, the shares shall be accounted for as puttable shares. A puttable (or callable) share awarded to a grantee as compensation shall be classified as a liability if either of the following conditions is met:

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 good is delivered or the service is rendered and the share is issued. A grantee begins to bear the risks and rewards normally associated with equity share ownership when all the goods are delivered or all the service has been rendered and the share is issued. A repurchase feature that can be exercised only upon the occurrence of a contingent event that is outside the grantee’s control (such as an initial public offering) would not meet this condition until it becomes probable that the event will occur within the reasonable period of time.
It is probable that the grantor would prevent the grantee from bearing those risks and rewards for a reasonable period of time from the date the share is issued.

For this purpose, a period of six months or more is a reasonable period of time.

25-10 A puttable (or callable) share that does not meet either of those conditions shall be classified as equity (see paragraph 718-10-55-85).

Classification of Certain Awards With Repurchase Features

55-84 The following paragraph further explains the guidance in paragraphs 718-10-25-9 through 25-12.

55-85 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)). 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 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.

A stock award (e.g., restricted stock) may include repurchase features on the underlying shares (e.g., puttable and callable shares). The type of an award’s repurchase features can affect its classification. Call options and put options are the most common types of repurchase features. A call option repurchase feature allows (but does not require) the entity to repurchase vested shares held by a grantee. A put option repurchase feature allows (but does not require) the grantee to cause the entity to repurchase vested shares that the grantee holds. The repurchase price associated with call and put options can vary (e.g., fair value, fixed amount, cost, formula value). In addition, the ability to exercise a repurchase feature is often contingent on certain events (e.g., termination of employment, change in control). A right of first refusal, which gives the grantor the ability to repurchase shares from the grantee before the grantee sells the shares to a third party, is an example of a contingent call option.

To determine the classification of a stock award (i.e., as liability or equity), an entity must understand the terms of the repurchase features associated with it. The decision trees and discussion throughout this section are intended to help an entity determine how such features affect the classification of awards. The guidance applies only to stock awards subject to ASC 718 that contain conditional features (e.g., call or put options) to transfer cash or other assets at settlement. This section therefore does not apply to the following awards:

Stock awards subject to ASC 718 that contain unconditional obligations to transfer cash or other assets. These awards are generally classified as share-based liabilities under ASC 718-10-25-7. See Section 5.2 for a discussion of applying the classification criteria in ASC 480 to share-based payment awards.
Stock options or similar instruments that have cash settlement or repurchase features subject to ASC 718. These awards are generally classified in accordance with ASC 718-10-25-11 and 25-12. See Section 5.4 for a discussion of the steps to follow in determining the classification of stock options with cash settlement or repurchase features. However, because ASC 718-10-25-11 requires liability classification for options and similar instruments if the underlying shares are classified as liabilities, ASC 718-10-25-9 and 25-10 apply to stock options or similar instruments in which the underlying shares are puttable or callable. Accordingly, an entity would apply the guidance in this section to determine the classification of those types of stock options or similar instruments. In addition, while grantees generally begin to bear the risks and rewards of share ownership when stock awards vest, they do not do so when stock options vest. Rather, grantees begin to bear the risks and rewards of share ownership when the stock options are exercised and the underlying shares are issued or issuable.

The determination of whether the grantee bears the risks and rewards normally associated with equity share ownership for a reasonable period is based on whether the repurchase feature is measured at fair value upon repurchase. If the repurchase feature is measured at fair value, the grantee bears the risks and rewards of equity share ownership by holding the shares (upon vesting for stock awards and upon exercise for stock option awards) for six months or more. If the repurchase feature is not measured at fair value, the grantee may not bear the risks and rewards of equity share ownership as long as the repurchase feature is outstanding, and the six-month period does not apply. As a result, many non–fair value repurchase features result in an award’s classification as a liability. However, the classification analysis will also depend on whether the repurchase feature is exercisable upon a contingent event, as further discussed below.

Much of the guidance below is based on analogies to Issue 23 of EITF Issue 00-23. While EITF Issue 00-23 was superseded by ASC 718 (previously issued as FASB Statement 123(R)), some of the superseded guidance is still relevant in the determination of whether a grantee bears the risks and rewards of equity share ownership (provided that it is consistent with ASC 718-10-25-9 and 25-10).

5.3.1 Repurchase Features — Puttable Stock Awards

To appropriately classify a stock award with a put option, an entity must first determine whether the put option’s exercisability is contingent on the occurrence of an event. If the contingent event is solely within the control of the grantee (e.g., voluntary termination), the repurchase feature should be analyzed as if it is noncontingent. Noncontingent puttable shares are generally classified as liabilities unless the put option is measured at fair value and cannot be exercised for at least six months after the shares have vested. Contingently puttable shares may require liability classification depending, in part, on whether the contingent event is solely within the grantee’s control. See the next section and Section 5.3.1.2 for discussions of how such noncontingent puttable shares and contingently puttable shares, respectively, should be evaluated under ASC 718-10-25-9(a).

If the put option does not result in liability classification, SEC registrants must consider the requirements of ASR 268 (FRR Section 211) and ASC 480-10-S99-3A, as discussed in SAB Topic 14.E. In accordance with that guidance, SEC registrants must present as temporary (or mezzanine) equity stock awards (otherwise classified as equity) that are subject to redemption features that are not solely within the control of the issuer. Temporary-equity classification is required if the puttable stock awards qualify for equity classification under the requirements of ASC 718 (e.g., a stock award that is puttable at fair value by the grantee more than six months after vesting). Puttable stock awards classified as temporary equity should be recognized at their redemption value. See Section 5.10 for discussion and examples of the application of ASR 268 and ASC 480-10-S99-3A to share-based payment awards with repurchase features.

5.3.1.1 Repurchase Features — Noncontingent Puttable Stock Awards

If the repurchase feature is measured at fair value, the employee bears the risks and rewards of equity share ownership by holding the shares for six months or more after the shares are issued or issuable (i.e., the shares become “mature”). If the repurchase feature is not measured at fair value, the employee may not bear the risks and rewards of equity share ownership as long as the repurchase feature is outstanding.

Liability classification is required if the noncontingent put option permits the grantee to avoid bearing the risks and rewards normally associated with share ownership for a reasonable period from the date on which the stock award is vested and the shares are issued or issuable. When determining classification, an entity also needs to consider the option’s repurchase price.

If the repurchase price is measured at fair value upon repurchase, to avoid liability classification, a grantee must bear the risks and rewards of share ownership for at least a period of six months from the date on which the stock award is vested and the shares are issued or issuable (for stock options, this would be the period from the date on which the award is exercised). A noncontingent put option (the exercise of which is in the grantee’s control) that allows the grantee to exercise the put option within six months of the vesting of the stock award results in liability classification of the stock award, even if the grantee is unlikely to exercise the put option during that period. If the grantee holds the shares for six months, the shares become “mature” and are reclassified to equity. If the noncontingent put option cannot be exercised within six months of vesting, the put option would not cause the stock award to be classified as a liability.

If the repurchase price is not measured at fair value as of the repurchase date (e.g., repurchase at a formula price), the grantee may not be subject to the risks and rewards of share ownership for as long as the put option is outstanding, regardless of whether the repurchase feature can only be exercised six months after the stock award vests. Therefore, if the repurchase price is not measured at fair value, the stock award (or some portion of the award) will generally be classified as a liability until the put option expires or is settled.

An exception to this requirement is a repurchase feature that enables entities to satisfy their statutory tax withholding requirements (see Example 5-5). See ASC 718-10-25-18 and Section 5.7.2 for a discussion of the effect of statutory tax withholding amounts on the classification of share-based payment awards.

Entities must continually assess their stock awards to ensure that they are appropriately classified. This assessment should occur in each reporting period on an individual-grantee basis. Awards that are initially classified as liability awards may subsequently be classified as equity awards if, for example, the repurchase feature expires or, for fair value repurchase features, the shares are held for at least six months from the date the stock awards vested (i.e., the shares are no longer immature). See Section 6.8.2 for a discussion of liability-to-equity modifications.

The examples below illustrate noncontingent put options commonly found in share-based payment arrangements.

Example 5-4

Repurchase at Fair Value

Entity A grants 1,000 shares of restricted stock to an employee that vest at the end of the second year of service (cliff vesting). The stock awards give the employee the right to require A to buy back its shares at their then-current fair value 12 months from the date the stock awards are fully vested.

The repurchase feature will not result in liability classification of the stock awards since the employee is required to bear the risks and rewards of share ownership for more than 6 months (i.e., 12 months) after the stock awards have vested. However, if A is an SEC registrant, it must apply the requirements in ASR 268 and ASC 480-10-S99-3A.

Example 5-5

Repurchase at Fair Value — Statutory Tax Withholding Requirements

Entity A grants 1,000 shares of restricted stock to an employee that vest at the end of the second year of service (cliff vesting). When the awards vest, the employee can require A to repurchase a portion of its shares at their then-current fair value to meet A’s statutory tax withholding requirements.

The repurchase feature will not result in liability classification of the stock awards under ASC 718-10-25-18 as long as the employee cannot require A to repurchase its shares in an amount that exceeds the maximum statutory tax rate(s) in its applicable jurisdiction(s) and A has a statutory tax withholding requirement. A repurchase feature giving the employee the right to require the repurchase of shares in excess of the maximum statutory tax rate(s) in its applicable jurisdiction(s) or in circumstances in which A does not have a statutory tax withholding requirement as of the vesting date will result in liability classification for the entire award.

Example 5-6

Repurchase at a Fixed Price — Award With Two Components

Entity A grants 1,000 shares of restricted stock to an employee that vest at the end of the second year of service (cliff vesting). The stock awards give the employee the right to require A to buy back its shares at a fixed amount 12 months from the date the stock awards are fully vested.

The repurchase feature will result in liability classification of the stock awards since the employee is not subject to the risks and rewards of share ownership for as long as the repurchase feature is outstanding, regardless of whether the repurchase feature can only be exercised more than six months after the shares vest. That is, the repurchase price is fixed at the inception of the arrangement and is therefore not measured at fair value. The stock award would generally be accounted for as an award with a liability and equity component in a manner similar to a combination award, as described in ASC 718-10-55-120 through 55-130. The liability component is based on the fixed amount for which the employee can require A to repurchase its shares, and the equity component is recognized as a call option with an exercise price equal to the fixed amount for which the employee can require A to repurchase its shares. If the fixed-price repurchase feature expires, the liability component is reclassified to equity.

Example 5-7

Repurchase at a Fixed Amount Over Fair Value

Entity A grants 1,000 shares of restricted stock to an employee that vest at the end of the second year of service (cliff vesting). The stock awards give the employee the right to require A to buy back its shares 12 months from the date the stock awards are fully vested. The repurchase amount will be based on the fair value of A’s shares on the date the employee exercises the put option plus $100 per share.

The repurchase feature will not result in liability classification of the stock awards for the portion of the awards subject to the repurchase feature at fair value since the employee is required to bear the risks and rewards of share ownership for more than 6 months (i.e., 12 months) after the stock awards have vested. However, if A is an SEC registrant, it must apply the requirements in ASR 268 and ASC 480-10-S99-3A. In addition, ASC 718-20-35-7 and ASC 718-10-55-85 require the recognition of additional compensation cost for the excess of the repurchase price over the fair-value-based measure of an award (i.e., $100 per share). The additional compensation cost is recognized over the requisite service period of the stock awards (i.e., two years), with a corresponding amount recognized as a liability.

Example 5-8

Repurchase at a Formula Price

Entity A grants 1,000 shares of restricted stock to an employee that vest at the end of the second year of service (cliff vesting). The stock awards give the employee the right to require A to buy back its shares 12 months from the date the stock awards are fully vested. The repurchase amount will be based on a multiple of A’s earnings.

The repurchase feature will result in liability classification of the stock awards if the repurchase amount is not measured at fair value; therefore, the employee would not be subject to the risks and rewards of share ownership regardless of whether the repurchase feature can only be exercised more than six months after the shares vest. Entity A will recognize the liability at its fair-value-based measure by using the formula price as of each reporting period.

Example 5-9

Repurchase Stock Options at Fair Value

Entity A grants 1,000 stock options to an employee that vest at the end of the second year of service (cliff vesting). The stock options give the employee the right to require A to buy back its shares at their then-current fair value 12 months from the date the stock options are exercised.

The repurchase feature will not result in liability classification of the stock options since the employee is required to bear the risks and rewards of share ownership for more than 6 months (i.e., 12 months) after the stock options have been exercised and the shares are outstanding.

5.3.1.2 Repurchase Features — Contingently Puttable Stock Awards

The probability analysis for a fair value repurchase feature is performed for the six-month “window” that the shares are “immature” (i.e., within six months of vesting). For a non–fair value repurchase feature, the analysis is performed for the entire period that the repurchase feature is outstanding. The analysis is generally performed on an individual-grantee basis and must be updated continually.

An entity should analyze a put option that becomes exercisable only upon the occurrence of a specified future event (i.e., the triggering event) to determine whether the triggering event is solely within the control of the grantee (i.e., the party that can exercise the put option). An entity should disregard triggering events solely within the control of the grantee and analyze the repurchase feature as if it is noncontingent (i.e., as if the triggering event already occurred) to determine whether it permits the grantee to avoid bearing the risks and rewards normally associated with share ownership for a reasonable period from the date the stock award is vested and the share is issued or issuable. See Section 5.3.1.1 for a discussion of the effect of noncontingent repurchase features on the classification of puttable stock awards.

If the triggering event is not solely within the control of the grantee, the entity should assess, on an individual-grantee basis, the probability that the triggering event will occur. Liability classification is required for stock awards with fair value repurchase features if (1) it is probable that the triggering event will occur within six months of the date the stock awards vest and (2) the repurchase feature will permit the grantee to avoid bearing the risks and rewards normally associated with share ownership for six or more months after the date the stock award is vested and the shares are issued or issuable. In addition, liability classification is generally required for stock awards with non–fair value repurchase features if (1) it is probable that the triggering event will occur while the repurchase feature is outstanding and (2) the repurchase feature will permit the grantee to avoid bearing the risks and rewards normally associated with share ownership while the repurchase feature is outstanding.

Equity classification is appropriate for stock awards with fair value repurchase features in which occurrence of the triggering event is (1) not solely within the control of the grantee and (2) not probable or only probable after the grantee has been subject to the risks and rewards normally associated with share ownership for six or more months from the date the stock award is vested and the shares are issued or issuable. If repurchase features are not measured at fair value, equity classification would generally only be appropriate for stock awards in which occurrence of the triggering event is (1) not solely within the control of the grantee and (2) not probable while the repurchase feature is outstanding.

Common triggering events for employee awards include:

Entities must continually assess their stock awards to ensure that they are appropriately classified. This assessment should occur in each reporting period on an individual-grantee basis. Awards that are initially classified as equity awards may be subsequently classified as liability awards as a result of a change in probability assessment. Likewise, awards that are initially classified as liability awards may subsequently be classified as equity awards if, for example, (1) there is a change in probability assessment, (2) the repurchase feature expires, or, (3) for fair value repurchase features, the shares are held for at least six months from the date on which the stock awards vested (i.e., the shares are no longer immature). See Section 6.8.2 for a discussion of liability-to-equity modifications.

Example 5-10

Contingent Put Right — Change in Control

Entity A grants 1,000 shares of restricted stock to an employee that vest at the end of the second year of service (cliff vesting). The stock awards give the employee the right to require A to buy back its shares once a change in control occurs. The repurchase amount will be based on the fair value of A’s shares on the date the employee exercises the put option.

The repurchase feature will not result in liability classification of the stock awards but may result in liability classification when it becomes probable that a change in control will occur. As discussed in Section 3.4.2.1, it is generally not considered probable that a change in control will occur until the change in control is consummated.

If the change in control occurs six months after the stock awards vest, equity classification will remain appropriate since the employee would have been subject to the risks and rewards normally associated with share ownership for at least a period of six months from the date the stock awards vested. However, if A is an SEC registrant, it must apply the requirements in ASR 268 and ASC 480-10-S99-3A.

5.3.2 Repurchase Features — Callable Stock Awards

In a manner similar to its treatment of a put option, an entity that grants a stock award with a call option must, to appropriately classify it, first determine whether the call option’s exercisability is contingent on the occurrence of a triggering event. However, unlike contingently puttable shares, all contingent events are assessed for probability, irrespective of whether the triggering event is solely within the grantee’s control. See Sections 5.3.2.1 and 5.3.2.2 for a discussion of how such noncontingent callable shares and contingently callable shares, respectively, should be evaluated under ASC 718-10-25-9(b).

Unlike put options, call options that do not result in liability classification are not assessed by SEC registrants in accordance with the requirements of ASR 268 and ASC 480-10-S99-3A because the redemption feature is solely within the control of the issuer, and that guidance applies only to awards with redemption features not solely within the control of the issuer. That is, a stock award with terms that only permit the entity to repurchase the shares will never be classified as temporary equity.

5.3.2.1 Repurchase Features — Noncontingent Callable Stock Awards

See footnote 3.

ASC 718-10-25-9(b) requires liability classification of stock awards when (1) the entity has the ability to call the shares upon the vesting of the award (i.e., the call option is noncontingent) and (2) it is probable that the call option will be exercised before the grantee has been subject to the risks and rewards normally associated with share ownership for a reasonable period from the date the stock award is vested and the shares are issued or issuable. The requirement to assess probability is different from the requirement in ASC 718-10-25-9(a). That guidance does not permit an assessment of the grantee’s probability of exercising a noncontingent put option. That is, a repurchase feature allowing grantees to exercise a noncontingent put option within six months of the vesting of the stock awards will always result in liability classification of the stock award, even if the grantee is unlikely to exercise the put option.

The probability assessment in ASC 718-10-25-9(b) should be based on (1) the entity’s stated representations that it has the positive intent not to call the shares while they are immature (i.e., within six months of vesting for fair value repurchase features and while the call option is outstanding for non–fair value repurchase features) and (2) all other relevant facts and circumstances. In assessing all other relevant facts and circumstances, the entity may analogize to the guidance in superseded Issue 23(a) of EITF Issue 00-23, which indicates that an entity should consider the following additional factors:

“The frequency with which the [grantor] has called immature shares in the past.”
“The circumstances under which the [grantor] has called immature shares in the past.”
“The existence of any legal, regulatory, or contractual limitations on the [grantor’s] ability to repurchase shares.”
“Whether the [grantor] is a closely held, private company.”

If the repurchase price is measured at fair value upon repurchase, to avoid liability classification, a grantee must bear the risks and rewards of share ownership for at least a period of six months from the date the stock award is vested and the shares are issued or issuable. A noncontingent call option (the exercise of which is in the entity’s control) that allows the entity to exercise the call option within six months of the vesting of the stock award results in liability classification of the stock award if it is probable that the entity will exercise the call option within those six months. If it is not probable that the entity will exercise the call option within those six months, the call option will not cause the stock award to be classified as a liability. In addition, if the noncontingent call option cannot be exercised within six months of vesting, the call option would not cause the stock award to be classified as a liability, and a probability assessment is not required.

An exception to liability classification is a repurchase feature that enables entities to satisfy their statutory tax withholding requirements (see Example 5-5). See ASC 718-10-25-18 and Section 5.7.2 for a discussion of the effect of statutory tax withholding amounts on the classification of share-based payment awards.

If the repurchase price is not measured at fair value on the repurchase date (e.g., a formula price), the grantee may not be subject to the risks and rewards of share ownership for as long as the call option is outstanding, regardless of whether the repurchase feature can only be exercised more than six months after the stock award vests. Therefore, the probability assessment should be performed for all periods for which the repurchase feature is outstanding. If the repurchase price is not measured at fair value, the stock award will generally be classified as a liability if it is probable that the entity will exercise the call option while the call option is outstanding. If it is not probable that the entity will exercise the call option while the call option is outstanding, the call option will not cause the stock award to be classified as a liability. An exception to liability classification can be applied if the repurchase price is at a fixed amount over the fair value on the repurchase date. In this case, if it is not probable that the call option will be exercised for at least six months from the date the stock awards vest but it is still probable that the call option will be exercised while the repurchase feature is outstanding, only the fixed amount in excess of fair value would be classified as a liability award. Further, it is generally probable that a noncontingent call feature that allows the entity to repurchase shares at a price that is below fair value or potentially below fair value on the repurchase date will be exercised irrespective of the holding period. However, the entity should evaluate the repurchase provision to determine whether, in substance, it represents a vesting condition or clawback feature (see Section 5.3.4 for further discussion).

Entities must continually assess their stock awards to ensure that they are appropriately classified. This assessment should occur in each reporting period on an individual-grantee basis. Awards may initially be classified as equity awards but, as a result of a change in the probability assessment, may subsequently be classified as liability awards. Likewise, awards that are initially classified as liability awards may subsequently be classified as equity awards if, for example, (1) there is a change in the probability assessment, (2) the repurchase feature expires, or (3) for fair value repurchase features, the shares are held for at least six months from the date the stock awards vested (i.e., the shares are no longer immature). See Section 6.8.2 for a discussion of liability-to-equity modifications.

Example 5-11

Noncontingent Call Right

Entity A grants 1,000 shares of restricted stock to an employee that vest at the end of the second year of service (cliff vesting). The employee is restricted from selling A’s shares to a third party for 12 months after they vest. During this 12-month period, A has the right to call its shares at their then-current fair value.

Entity A should assess the probability that it will call the shares within six months of the vesting of the stock awards. Liability classification is required if it is probable that the shares will be called within six months from the date the stock awards vest.

If A is an SEC registrant and the stock awards are not classified as a liability, temporary equity classification of the stock awards will not be required under ASC 480-10-S99-3A because that guidance does not apply to stock awards with redemption features that are solely within the control of the issuer.

5.3.2.2 Repurchase Features — Contingently Callable Stock Awards

See footnote 3.

An entity should analyze a contingent call option that becomes exercisable only upon the occurrence of a specified future event (i.e., the triggering event) to determine whether it is probable that the triggering event will occur on an individual-grantee basis. For repurchase features that are measured at fair value as of the repurchase date, the probability assessment should cover the period during which the shares are immature (i.e., within six months of vesting). For repurchase features that are not measured at fair value as of the repurchase date, the probability assessment should generally cover the period during which the repurchase feature is outstanding. In the latter situation, whether the shares are immature or mature is generally not relevant to the probability assessment since the grantee would generally not be subject to the risks and rewards of share ownership if the non–fair value repurchase feature is exercised, regardless of whether the repurchase feature is exercised more than six months after the shares vest. In addition, unlike the put option assessment, the probability assessment may be performed regardless of whether the occurrence of the triggering event is solely in the control of the party that can exercise the repurchase feature (i.e., the entity for call options). If it is not probable that the triggering event will occur while the shares are immature (for fair value repurchase features) or at any time before the repurchase feature expires (for non–fair value repurchase features), the repurchase feature will not result in liability classification. If it is probable that the triggering event will occur while the shares are immature (for fair value repurchase features) or at any time before the repurchase feature expires (for non–fair value repurchase features), the entity should analyze the repurchase feature as if it is noncontingent (i.e., as if the triggering event already occurred). See Section 5.3.2.1 for a discussion of the accounting for noncontingent repurchase features associated with a call option.

Like noncontingent callable stock awards, contingently callable stock awards must be continually assessed by entities to ensure that they are appropriately classified. This assessment should occur in each reporting period on an individual-grantee basis. Awards may be initially classified as equity awards but, as a result of a change in the probability assessment, may be subsequently classified as liability awards. Likewise, awards that are initially classified as liability awards may be subsequently classified as equity awards if, for example, (1) there is a change in the probability assessment, (2) the repurchase feature expires, or (3) for fair value repurchase features, the shares are held for at least six months after the awards vest (i.e., the shares are no longer immature). See Section 6.8.2 for a discussion of liability-to-equity modifications.

Example 5-12

Contingent Call Right — Termination

Entity A grants 1,000 shares of restricted stock to an employee that vest at the end of the second year of service (cliff vesting). If employment is terminated for any reason after vesting, A has the right to call its shares at their then-current fair value.

Entity A should assess the probability that employment will terminate within six months of the vesting of the stock awards (this assessment is performed on an individual-employee basis). If it is not probable that employment will terminate within six months of vesting, the stock awards are classified as equity. If it is probable that employment will terminate within six months of vesting, A should treat the repurchase feature as if it is noncontingent and determine whether it is probable that it will call the shares within six months from the date the stock awards vest.

Example 5-13

Contingent Call Right — Termination

Entity A should assess the probability that employment will terminate while the repurchase feature is outstanding. While it is certain that employment will terminate at some point, in certain circumstances it may be appropriate to perform the probability assessment (on an individual-employee basis) for the period before an expected IPO or change in control (e.g., there is a single controlling shareholder that has an exit strategy for the entity and a past practice of fulfilling similar exit strategies for its investments). If it is not probable that employment will terminate during that period, the stock awards are classified as equity. If it is probable that employment will terminate during that period, A should treat the repurchase feature as if it is noncontingent and determine whether it is probable that it will call the shares during that period. If the formula price could potentially be below fair value on the repurchase date, it is generally probable that the call feature will be exercised and that the award would therefore typically be classified as a liability.

5.3.3 Book-Value Plans for Employees

ASC 718-10

Example 8: Book Value Plans for Employees

55-131 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; 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.

55-132 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.

55-133 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.

Certain employee share-based payment transactions that are based on a book or formula plan may not be compensatory or classified as liabilities. If employees purchase shares at a formula price and the shares have repurchase features that use that same formula price, there may be no compensation cost if the same formula price is used for all transactions in the same class of shares (or in substantially similar classes of shares). In such circumstances, the formula price essentially establishes the fair value of the shares. The entity must still evaluate the repurchase feature under ASC 718-10-25-9 to determine whether it would cause the shares to be classified as liabilities. If the repurchase price essentially is measured at fair value, liability classification would not be required if the repurchase feature can only be exercised after six months. See Sections 5.3.1 and 5.3.2 for a discussion of the treatment of repurchase features with a fair value repurchase price.

5.3.4 Repurchase Features That Function as Vesting Conditions or Clawback Features

Some awards have repurchase features exercisable by an entity (i.e., call options) with a repurchase price that is (1) equal to the cost of the shares or (2) the lower of cost or fair value. The repurchase features for such awards function as in-substance vesting conditions or clawback features, and do not affect the awards’ classification (i.e., the analysis in Sections 5.3.1 and 5.3.2 related to repurchase features is not required) because they do not represent, in substance, cash settlement features. See Sections 3.4.3 and 3.9 for further discussion of features that function as vesting conditions and clawback features.

Footnotes

See footnote 3.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.