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In addition to grants by their employer, employees may earn awards granted by other parties. To determine which awards are subject to ASC 718, companies should consider awards granted by related parties or other holders of an economic interest, which includes any person or entity that has a financial interest in the company (e.g., via equity or debt securities, or certain contractual arrangements). Under ASC 718-10-15-4, if a related party or other economic interest holder of the company grants an employee of the company an instrument that falls within the scope of ASC 718, that transaction should be accounted for by the company as stock-based compensation. These types of awards are commonly granted in holding company situations, where equity of another entity within a holding company structure is issued to employees of the reporting entity. However, such awards are not limited to these situations.
For example, if an investor transfers some of its shares to an employee for no consideration, it would be accounted for as if the investor granted the shares on behalf of the company unless the transaction is clearly for a purpose other than compensation for services provided by the employee to the company. The substance of the transaction is that the investor is making a capital contribution to the company, and the company, in turn, is making a share-based payment to its employee in exchange for services. Thus, the company would record a capital contribution from the investor and compensation cost for the value of the shares transferred to the employee.
The same considerations would apply to grants of stock options and any other share-based payment awards, whether indexed to the company’s stock or the economic interest holder’s stock (although in this latter case, the awards may be considered to be based on the equity of another entity subject to the guidance in ASC 815, Derivatives and Hedging). See SC 1.6 for discussion of awards issued among entities within a consolidated group and SC 7.2.8 for considerations when an equity method investor issues share-based payment awards indexed to the investor’s stock to employees of the equity method investee.
ASC 718’s definition of a related party is consistent with the definition in ASC 850, Related Party Disclosures. However, ASC 718’s definition of other economic interest holders includes a broader array of individuals and entities whose awards to a company’s employees would be subject to ASC 718 because it includes parties that hold any form of financial interest in the company.
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