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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations
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When an instrument ceases to be subject to FASB ASC Topic 718 and becomes subject to the recognition and measurement requirements of other applicable GAAP, the staff believes that the company should reassess the classification of the instrument as a liability or equity at that time and consequently may need to reconsider the applicability of ASR 268.
Question 2: How should Company F
apply ASR 268 and related guidance to the shares or share options granted under the share-based payment arrangements with employees that may be unvested at the date of grant?
Interpretive Response: Under FASB
ASC Topic 718, when compensation cost is recognized for instruments classified as equity instruments, additional paid-in-capital 82 is increased. If the award is not fully vested at the grant date, compensation cost is recognized and additional paidin-capital is increased over time as services are rendered over the requisite service period. A similar pattern of recognition should be used to reflect the amount presented as temporary equity for share-based payment awards that have redemption features that are outside the issuers control but are classified as equity instruments under FASB ASC Topic 718. The staff believes Company F should present as temporary equity at each balance sheet date an amount that is based on the redemption amount of the instrument, but takes into account the proportion of consideration received in the form of employee services. Thus, for example, if a nonvested share that qualifies for equity or other assets at a fixed or determinable price on a fixed or determinable date, at the option of the holder, or upon the occurrence of an event that is not solely within the control of the issuer would not be assumed by the staff to require net cash settlement for purposes of applying ASR 268 in circumstances in which FASB ASC Section 815
4025, Derivatives and HedgingContracts in Entitys Own EquityRecognition, would otherwise require the assumption of net cash settlement. See FASB ASC paragraph 8154025
11 See FASB ASC paragraph 81510651 for the transition and effective date information related to FASB ASU No. 202006, DebtDebt with Conversion and Other Options Subtopic 47020
and Derivatives and HedgingContracts in Entitys Own Equity Subtopic 81540: Accounting for Convertible Instruments and Contracts in an Entitys Own Equity, which superseded FASB ASC
paragraph 815402511., which states, in part:
. . . the events or actions necessary to deliver registered shares are not controlled by an entity and, therefore, except under the circumstances described in FASB ASC paragraph 815402516, if the contract permits the entity to net share or physically settle the contract only by delivering registered shares, it is assumed that the entity will be required to net cash settle the contract. See also FASB ASC subparagraph 718102515a.
82 Depending on the fact pattern, this may be recorded as common stock and additional paid in capital.

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classification under FASB ASC Topic 718 is redeemable at fair value more than six months after vesting, and that nonvested share is 75% vested at the balance sheet date, an amount equal to 75% of the fair value of the share should be presented as temporary equity at that date. Similarly, if an option on a share of redeemable stock that qualifies for equity classification under FASB ASC
Topic 718 is 75% vested at the balance sheet date, an amount equal to 75% of the intrinsic 83 value of the option should be presented as temporary equity at that date.
Question 3: Would the methodology described for employee awards in the Interpretive Response to Question 2
above apply to nonemployee awards to be issued in exchange for goods or services with similar terms to those described above?
Interpretive Response: The staff believes it would generally be appropriate to apply the methodology described in the Interpretive Response to Question 2 above to nonemployee awards.
F. Classification of Compensation Expense Associated With Share-Based Payment Arrangements Facts: Company G utilizes both cash and share-based payment arrangements to compensate its employees and nonemployee service providers.
Company G would like to emphasize in its income statement the amount of its compensation that did not involve a cash outlay.
Question: How should Company G
present in its income statement the noncash nature of its expense related to share-based payment arrangements?
Interpretive Response: The staff believes Company G should present the expense related to share-based payment arrangements in the same line or lines as cash compensation paid to the same employees or nonemployees.84 The staff believes a company could consider disclosing the amount of expense 83 The potential redemption amount of the share option in this illustration is its intrinsic value because the holder would pay the exercise price upon exercise of the option and then, upon redemption of the underlying shares, the company would pay the holder the fair value of those shares.
Thus, the net cash outflow from the arrangement would be equal to the intrinsic value of the share option. In situations where there would be no cash inflows from the share option holder, the cash required to be paid to redeem the underlying shares upon the exercise of the put option would be the redemption value.
84 FASB ASC Topic 718 does not identify a specific line item in the income statement for presentation of the expense related to share-based payment arrangements, with the exception of the guidance in ASC 71810155A on share-based payment awards granted to a customer.

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related to share-based payment arrangements included in specific line items in the financial statements.
Disclosure of this information might be appropriate in a parenthetical note to the appropriate income statement line items, on the cash flow statement, in the footnotes to the financial statements, or within MD&A.
G. Removed by SAB 114
H. Removed by SAB 114
I. Capitalization of Compensation Cost Related to Share-Based Payment Arrangements Facts: Company K is a manufacturing company that grants share options to its production employees. Company K has determined that the cost of the production employees service is an inventoriable cost. As such, Company K
is required to initially capitalize the cost of the share option grants to these production employees as inventory and later recognize the cost in the income statement when the inventory is consumed.85
Question: If Company K elects to adjust its period end inventory balance for the allocable amount of share-option cost through a period end adjustment to its financial statements, instead of incorporating the share-option cost through its inventory costing system, would this be considered a deficiency in internal controls?
Interpretive Response: No. FASB ASC
Topic 718, CompensationStock Compensation, does not prescribe the mechanism a company should use to incorporate a portion of share-option costs in an inventory-costing system.
The staff believes Company K may accomplish this through a period end adjustment to its financial statements.
Company K should establish appropriate controls surrounding the calculation and recording of this period end adjustment, as it would any other period end adjustment. The fact that the entry is recorded as a period end adjustment, by itself, should not impact managements ability to determine that the internal control over financial reporting, as defined by the SECs rules implementing Section 404 of the Sarbanes-Oxley Act of 2002,86 is effective.
85 FASB

ASC paragraph 71810252A.
No. 3447986, June 5, 2003, Managements Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Period Reports.
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