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Employees of a subsidiary that is included in the parent company’s consolidated financial statements are considered employees of the parent company for purposes of applying ASC 718.
Under ASC 718, the employees of an unconsolidated entity’s (e.g., equity method investees, joint venture) who are granted an instrument in the investor company’s equity are not considered employees of the investor company. This conclusion would also apply to awards granted by a company to former employees of the company who are now employed by an unconsolidated joint venture of the company. See additional discussion in SC 7.2.8 on accounting by an investor for stock-based compensation granted to employees of an equity method investee.
When an entity grants awards of other entities’ equity to its employees, including, for example, an equity method investee granting its investor’s equity to the investee’s employees, ASC 718 does not apply because the awards are not the equity of the granting company. The investee company would follow the guidance in ASC 815, Derivatives and Hedging (ASC 815-10-55-46 through ASC 815-10-55-48) for these awards.
Example SC 1-1 illustrates the accounting for awards granted to companies under common control as part of a consolidated group.
EXAMPLE SC 1-1
Awards granted to employees of companies under common control
Parent is a company with two consolidated subsidiaries, Sub Z and Sub Y. During the year, the following stock-based compensation is granted:
Scenario 1: Parent grants equity in Parent to Sub Z’s employees
Scenario 2: Sub Z grants equity in Sub Z to Parent’s employees
Scenario 3: Sub Z grants options to purchase Sub Z’s shares to employees of Sub Y
Scenario 4: Parent grants awards indexed to the price of Parent’s stock that can be settled, at the employee’s direction, in cash (by Parent) to employees of Sub Z
How should the awards be reflected in the financial statements of Parent and its subsidiaries?
Analysis
Scenario 1: Parent grants equity in Parent to Sub Z’s employees
Parent consolidated financial statements
Sub Z separate financial statements
Awards would be measured at fair value on the grant date and accounted for as awards granted to an employee, as defined by ASC 718.
Awards would be accounted for under ASC 718. Sub Z would recognize compensation cost at grant date fair value. If Sub Z does not provide any consideration to Parent for the awards, the value of the awards granted to Sub Z’s employees would be considered a capital contribution from Parent (i.e., compensation cost with an offsetting entry to capital contribution within equity).
Scenario 2: Sub Z grants equity in Sub Z to Parent’s employees
Sub Z separate financial statements
Parent consolidated financial statements
The equity grant would be measured at fair value on the grant date and recognized as a dividend to Parent because, as the controlling entity, Parent could require Sub Z to grant the awards to Parent’s employees, even though they are not rendering any services to Sub Z.
The equity grant would be accounted for as employee awards, as defined by ASC 718. Awards of subsidiary equity represent equity (non-controlling interest) in the consolidated entity.
Scenario 3: Sub Z grants options to purchase Sub Z’s shares to employees of Sub Y
Parent consolidated financial statements
These awards would be accounted for in Parent’s consolidated financial statements as employee awards. This is substantively the same as Scenario 2.
Sub Z separate financial statements
Sub Y separate financial statements
The options would generally be measured at fair value on the grant date and recognized as a dividend to Parent because, as the controlling entity, Parent could require Sub Z to grant the options to Sub Y’s employees.
Notwithstanding the general model, in certain circumstances it may be appropriate to account for such awards as nonemployee awards and recognize the expense in the grantor’s standalone financial statements provided it is clear that the grantor is receiving services in exchange for the award.
The grant of Sub Z’s options to the employees of Sub Y would generally be considered awards based on the equity of another entity. Under this view, the awards would be accounted for in accordance with ASC 815-10-55-46 through ASC 815-10-55-48 with the change in fair value measured each reporting period and recognized as compensation cost. As the awards are provided to Sub Y by Parent (through Parent’s direction of Sub Z to issue the awards), the change in fair value would be considered a capital contribution and recognized as an increase or decrease in Parent’s equity in Sub Y’s standalone financial statements.
Scenario 4: Parent grants awards indexed to the price of Parent’s stock that can be settled, at the employee’s direction, in cash (by Parent) to employees of Sub Z.
Parent consolidated financial statements
Sub Z separate financial statements
Because the payment is indexed to Parent’s stock price, it would be accounted for under ASC 718. Since the awards allow for cash settlement at the employee's election, they would be liability-classified in Parent’s consolidated financial statements. Accordingly, the awards would be remeasured each reporting period by Parent until final settlement.
The awards would be accounted for as employee awards under ASC 718. The impact of remeasuring the awards each reporting period should be reflected (“pushed down”) in Sub Z’s standalone financial statements, generally as a capital contribution from Parent (i.e., compensation cost with an offsetting entry to capital contribution within equity). Sub Z would not record a liability as it is not legally obligated to make the payment.
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