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This section discusses presentation requirements and considerations for stock-based compensation on the balance sheet and in the income statement and statement of stockholders’ equity. See FSP 6 for presentation considerations for the statement of cash flows.

15.3.1 Balance sheet

Stock-based compensation awards are classified as either equity or liabilities (see SC 3.3). When an award is classified as a liability, a reporting entity should determine whether it is a current or noncurrent liability. A liability-classified award is generally classified as current if a vested award is payable upon demand or if vesting is expected to occur within one year. All other liability awards are classified as noncurrent.
Example FSP 15-1 illustrates the balance sheet classification of a cash-settled award.
EXAMPLE FSP 15-1
Short-term versus long-term classification of a cash settled award
On December 1, 20X1, FSP Corp granted 100,000 cash-settled stock appreciation rights ("SARs") to certain employees. The SARs have a two-year vesting period. At December 31, 20X3, the fully vested awards are out-of-the-money and management expects the awards to remain out of the money for at least another twelve months. Accordingly, FSP Corp does not expect to settle the liability for these awards within the following year.
Under the guidance in ASC 718, the awards are classified as liabilities and are marked to market each period. Although the SARs are out of the money at December 31, 20X3, they are financial instruments that continue to have some value due to the option's time value component.
Should FSP Corp classify the SARs liability as non-current?
Analysis
No. The SARs liability should be classified as current because the SARs are fully vested and exercisable as of the balance sheet date. ASC 470-10-45-10 states that current liability classification includes obligations that, by their terms, are due on demand or will be due on demand within one year from the balance sheet date, even though settlement may not be expected within that period.

15.3.2 Income statement

Stock-based compensation expense should be included in the same income statement line or lines as the cash compensation paid to the employees receiving the stock-based awards (for example, cost of sales, research and development costs, or general and administrative costs).
As indicated in the SEC’s Division of Corporation Finance Current Accounting and Disclosure Issues (Section I(B)(2)), reporting entities should avoid presenting stock-based compensation in any of the following ways:
• Separate line item presentation in the income statement (for example, a line item titled “noncash compensation”)
• One or more separate line items
• A table totaling the amount of share-based compensation included in various line items
However, the SEC staff noted in SAB Topic 14F (codified in ASC 718-10-S99-1) that a parenthetical note to the respective income statement line items indicating the amount of stock-based compensation expense included in the line item would be acceptable. See sample presentation in Figure FSP 15-1.
Figure FSP 15-1
Sample stock-based compensation parenthetical presentation
Revenues
$xx
Cost of sales (including noncash compensation of $XX)
xx
Gross margin
xx
Selling expense (including noncash compensation expense of $XX)
xx
General and administrative expense (including noncash compensation expense of $XX)
xx
Research and development expense (including noncash compensation expense of $XX)
xx
Total operating expenses
xx
Income from operations
$xx

In addition, the SEC staff has not objected to a footnote presentation on the face of the income statement (as opposed to parenthetical disclosure) indicating the amount of stock-based compensation expense included in each of the respective expense line items. However, it is not acceptable to include a total of the stock-based compensation expense.
Other commonly accepted methods of disclosing total stock-based compensation expense include footnote disclosure or presenting the total as a line item in the statement of cash flows.

15.3.2.1 Capitalized compensation cost

The guidance uses the term compensation cost rather than compensation expense to emphasize that an entity could be required to capitalize stock-based compensation under the applicable US GAAP, similar to the treatment of cash compensation. For example, employee costs could require capitalization as:
• Inventory
• Deferred loan origination costs
• Contract accounting assets
• Self-constructed fixed assets
• Capitalized software (internal-use and to be sold, leased, or marketed)
As discussed in ASC 718-10-50-2(h)(1)(ii), a reporting entity should disclose the total compensation cost that is capitalized as part of the cost of an asset.

15.3.3 Temporary (mezzanine) equity

Financial statements filed with the SEC must follow the guidance in ASR 268, which requires certain awards to be classified as temporary equity. This guidance applies if redemption of the award (or underlying shares) is outside of the control of the issuer. This could include awards such as:
• Shares that are redeemable at the employee’s discretion after a six-month holding period, or based on contingent events
• Options with underlying shares that are redeemable at the employee’s discretion after a six-month holding period, or based on contingent events
• Options with cash settlement features based on contingent events
For information on accounting for awards classified as temporary equity, see SC 3.3.10. FSP 5.6.3 discusses presentation and disclosure requirements associated with temporary equity.
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