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A tracking stock is a security issued by a parent company to track the results of one (or more) of its subsidiaries or lines of business. Tracking stock is considered for legal and accounting purposes to be equity of the parent company, and not equity of the unit or subsidiary to which the stock tracks. The holders of tracking stock are considered to hold equity of the parent and not the specific entity represented by the tracking stock. As such, awards based on a tracking stock should generally be accounted for as equity awards of the parent if the tracking stock is deemed to be substantive. We believe that the following factors would be considered to determine whether a tracking stock is substantive:
  • Reasons for the issuance
  • Whether the shares have been issued to third parties
  • Whether the voting rights of the holders of the tracking stock are similar to the rights of the holders of the parent company stock
If tracking stock is not deemed to be substantive (e.g., issued only to management for purposes of paying out cash based on certain divisions’ results), it would not be considered equity for share-based payment purposes and the award should be accounted for as either a cash-based award or as a formula-based award.
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