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Parent consolidated financial statements | Sub Z separate financial statements | |
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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).
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Sub Z separate financial statements | Parent consolidated financial statements | |
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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. See also BC 5.4.2 for an example of the accounting for non-controlling interests related to awards issued by a subsidiary.
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Parent consolidated financial statements | ||
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These awards would be accounted for in Parent’s consolidated financial statements as employee awards. This is substantively the same as Scenario 2.
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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.
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Parent consolidated financial statements | Sub Z separate financial statements | |
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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 in Sub Z’s standalone financial statements, generally as compensation cost with an offsetting entry to contributed capital. Sub Z would generally not record a liability as it is not legally obligated to make the payment. In certain fact patterns, Sub Z may need to record a liability in its financial statements; for example, if Sub Z employees have recourse against Sub Z if Parent fails to make the payment or Sub Z has an obligation to Parent to fund the settlement of the awards.
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