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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations Facts: Company D is a public company that entered into a material contract with a customer after market close. Subsequent to entering into the contract but before the market opens the next trading day, Company D awards share options to its executives. The share option award is non-routine, and the award is approved by the Board of Directors in contemplation of the material contract. Company D expects the share price to increase significantly once the announcement of the contract is made the next day. Company Ds accounting policy is to consistently use the closing share price on the day of the grant as the current share price in estimating the grant-date fair value of share options.
Question 1: Should Company D make an adjustment to the closing share price to determine the current price of shares underlying share options?
Interpretive Response: Prior to awarding share options in this fact pattern, the staff expects Company D to consider whether such awards are consistent with its policies and procedures, including the terms of the compensation plan approved by shareholders, other governance policies, and legal requirements. The staff reminds companies of the importance of strong corporate governance and controls in granting share options, as well as the requirements to maintain effective internal control over financial reporting and disclosure controls and procedures.
In estimating the grant-date fair value of share options in this fact pattern, absent an adjustment to the closing share price to reflect the impact of Company Ds new material contract with a customer, the staff believes the closing share price would not be a reasonable and supportable estimate and, without an adjustment the valuation of the award would not meet the fair value measurement objective of FASB ASC Topic 718 because the closing share price would not reflect a price that is unbiased for marketplace participants at the time of the grant.74
Question 2: What disclosures would the staff expect Company D to include in its financial statements regarding its determination of the current price of shares underlying newly-granted share options?
Interpretive Response: FASB ASC
paragraph 71810501 requires disclosure of information that enables users of the financial statements to understand, among other things, the nature and terms of share-based payment arrangements that existed 74 FASB

ASC paragraph 718105513.

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during the period and the potential effects of those arrangements on shareholders. FASB ASC paragraph 71810502 prescribes the minimum information needed to achieve the Topics disclosure objectives, including a description of the method used and significant assumptions used to estimate the fair value of awards under sharebased payment arrangements.
Accordingly, the staff expects that, at a minimum, Company D would disclose in a footnote to its financial statements how it determined the current price of shares underlying share options for purposes of determining the grant-date fair value of its share options in accordance with FASB ASC Topic 718.
For example, the staff would expect Company D to disclose its accounting policy related to how it identifies when an adjustment to the closing price is required, how it determined the amount of the adjustment to the closing share price, and any significant assumptions used to determine such adjustment, if material. Further, the characteristics of the share options, including their spring-loaded nature, may differ from Company Ds other share-based payment arrangements to such an extent Company D should disclose information regarding these share options separately from other share-based payment arrangements to allow investors to understand Company Ds use of sharebased compensation.75
Additionally, Company D should consider the applicability of MD&A and other disclosure requirements, including those related to liquidity and capital resources, results of operations, critical accounting estimates, executive compensation, and transactions with related persons.76
E. FASB ASC Topic 718, CompensationStock Compensation, and Certain Redeemable Financial Instruments Certain financial instruments awarded in conjunction with share-based payment arrangements have redemption features that require settlement by cash or other assets upon the occurrence of events that are outside the control of the issuer.77 FASB ASC Topic 718 provides 75 ASC

71810501 and 71810502g.
303, 402, and 404 of Regulation SK.
77 The terminology outside the control of the issuer is used to refer to any of the three redemption conditions described in Rule 502.27 of Regulation SX that would require classification outside permanent equity. That rule requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable 1 at a fixed or determinable price on a fixed or determinable date, 2 at the option of the holder, or 3 upon the 76 Items
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guidance for determining whether instruments granted in conjunction with share-based payment arrangements should be classified as liability or equity instruments. Under that guidance, most instruments with redemption features that are outside the control of the issuer are required to be classified as liabilities; however, some redeemable instruments will qualify for equity classification.78 SEC Accounting Series Release No. 268, Presentation in Financial Statements of Redeemable Preferred Stocks, 79 ASR 268 and related guidance 80 address the classification and measurement of certain redeemable equity instruments.
Facts: Under a share-based payment arrangement, Company F grants to an employee shares or share options that all vest at the end of four years cliff vest. The shares or shares underlying the share options are redeemable for cash at fair value at the holders option, but only after six months from the date of share issuance as defined in FASB
ASC Topic 718. Company F has determined that the shares or share options would be classified as equity instruments under the guidance of FASB ASC Topic 718. However, under ASR 268 and related guidance, the instruments would be considered to be redeemable for cash or other assets upon the occurrence of events e.g., redemption at the option of the holder that are outside the control of the issuer.
Question 1: While the instruments are subject to FASB ASC Topic 718, is ASR
268 and related guidance applicable to instruments issued under share-based payment arrangements that are classified as equity instruments under FASB ASC Topic 718?
Interpretive Response: Yes. The staff believes that registrants must evaluate whether the terms of instruments granted in conjunction with share-based payment arrangements that are not classified as liabilities under FASB ASC
Topic 718 result in the need to present certain amounts outside of permanent equity also referred to as being presented in temporary equity in accordance with ASR 268 and related guidance.81
occurrence of an event that is not solely within the control of the issuer.
78 FASB ASC paragraphs 71810256 through 718102519A.
79 ASR 268, July 27, 1979, Rule 502.27 of Regulation SX.
80 Related guidance includes EITF Topic No. D
98, Classification and Measurement of Redeemable Securities, included in the FASB ASC in paragraph 48010S993A.
81 Instruments granted in conjunction with sharebased payment arrangements with employees that do not by their terms require redemption for cash
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