Question

BUS1 121B – Intermediate Accounting II

Respond to the following prompt

Ten years down the road, you go to work as the controller of a start-up tech company that received its second major round of funding about a year ago and is searching for its third round of funding in order to continue to grow. However, the company is struggling to adequately compensate its employees and is concerned about losing high-quality talent to larger, better-funded competitors. It has previously established a generous share-based compensation plan in which employees receive equity stakes in the firm in addition to normal salary, but given that the firm is a long way from going public many of the employees see the share-based compensation as valueless.

As such, the firm has established a new compensation plan wherein each employee receives, in addition to their normal stock grants of 20,000 shares per year, they receive an additional set of grant each year of 25,000 shares that vest on a graded basis of 25% per semi-annual period over the next two years and which, one year after full vesting, the firm promises to repurchase the grant at the greater of either $5 per share or the market price of the shares, if the equity is publicly traded at that time.

How should the firm account for the traditional equity-based compensation plan and the new compensation plan? Cite ASC where appropriate.

Answer 1

ASC 718 addresses all forms of equity-based compensation, Share Based Payments are given as an incentive to the employees to remain in the entity's employment or to reward them for their efforts in improving the entity's performance. By granting these, in addition to other remuneration, the entity is paying additional remuneration to obtain additional benefits i.e. services. SBC expense is an opearting expense and is allocated to relevant operating line items.

ASC 718’s measurement objective is to determine the fair value of stock-based compensation at the grant date assuming that employees fulfill the award’s vesting conditions and will retain the award. The fair value of an award is the cost to the company of granting the award and should reflect the estimated value of the instruments that the company would be obligated to provide to an employee when the employee has satisfied the service conditions. For most awards, the cost will be measured once at the grant date fair value and will not be adjusted for subsequent changes in fair value.