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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, 20X6, 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, 20X8, 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, 20X8, 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.
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