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One of the fundamental principles of ASC 815 is that derivatives represent rights or obligations that meet the definitions of assets or liabilities. Consequently, items classified as equity are not within the scope of ASC 815. The following contracts that involve an entity’s own equity are explicitly excluded from the scope of ASC 815:
  • Contracts issued or held by that reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’ equity in its balance sheet (FG 5.6)
  • Contracts issued by an entity that are subject to the share-based payment guidance in ASC 718, Compensation – Stock Compensation (DH 3.3.1)
  • Forward contracts to enter into a business combination (DH 3.3.2)
  • Certain financial instruments within the scope of ASC 480, Distinguishing Liabilities From Equity (DH 3.3.3)
These scope exceptions are available to the issuer of such contracts, provided certain criteria are met, but do not apply to the counterparty to these contracts. For example, nonemployees who have received stock options in exchange for goods and services would not be eligible for the share-based payment scope exception under the exclusion in (b).

3.3.1 Share-based payments

Another scope exception applicable to contracts involving an entity’s own equity is for stock-based compensation contracts accounted for in accordance with ASC 718. Figure DH 3-9 summarizes guidance relating to assessing whether an instrument is within the scope of these standards. Once a contract ceases to be subject to ASC 718, it may be within the scope of ASC 815.
This scope exception does not apply to the counterparty to the contract; for example, equity instruments (including stock options) that are received by nonemployees as compensation for goods and services in share-based payment transactions are subject to ASC 815.
Figure DH 3-9
Scope considerations for issuers of stock-based compensation
Guidance
Scope guidance
Instruments within the scope of ASC 718
Instrument ceases to be within the scope of ASC 718 if the terms are modified when the grantee is no longer an employee or after a nonemployee vests in the award and is no longer providing goods or services (ASC 718-10-35-11), other than those instruments described in ASC 718-10-35-10.
Subsequent to the modification, recognition and measurement of the instrument should be determined through reference to other applicable GAAP (e.g., ASC 480 or ASC 815).
Accounting matters relating to instruments within the scope of ASC 718 are discussed in PwC’s Stock-based compensation guide.

3.3.2 Forward contracts to enter into a business combination

A contract between an acquirer and a seller to enter into a business combination at a future date is not subject to ASC 815. However, an acquiree’s contracts need to be re-evaluated at the acquisition date to determine if any contracts are derivatives or contain embedded derivatives that need to be separated and accounted for as derivatives. This includes reviewing contracts that qualify for the normal purchases and normal sales exception and documenting the basis for making such an election. The determination is made based on the facts and circumstances at the date of the acquisition. Accounting for business combinations is discussed in PwC’s Business combinations and noncontrolling interests guide.

3.3.3 Financial instruments within the scope of ASC 480

A forward repurchase contract that, by its terms, must be physically settled by delivering cash in exchange for a fixed number of the reporting entity’s shares should be recorded as a liability under the guidance in ASC 480-10.
The FASB considered such contracts to be more akin to a treasury stock purchase using borrowed funds than a derivative and excluded them from the scope of ASC 815. However, if a reporting entity either can or must settle a contract by issuing its own equity instruments, but the contract is indexed to something other than the entity’s own stock (e.g., a warrant that is exercisable only if the S&P 500 increases by 5%), the contract should be accounted for as a derivative by the issuer and the holder.
Application of ASC 480 is discussed in FG 5.5.
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