All ESPPs are considered compensatory (i.e., compensation cost is recognized), unless they satisfy certain conditions specified by ASC 718-50-25-1.

An ESPP is considered non-compensatory if it meets all of the following conditions:

The ESPP has:

Under ASC 718-50-25-1 and ASC 718-50-55-35, if the purchase discount is greater than 5%, then at least annually and by no later than the time of first purchase of shares under an ESPP in a given year, a company should assess whether its ESPP purchase discount rate is greater than estimated issuance costs per share as a percentage of the stock price at the grant date. If there is no stock offering, the company should determine a hypothetical amount of issuance costs that would have been incurred (i.e., the costs avoided by the company by issuing the shares through the ESPP) had there been a stock offering. The data used to support a discount in excess of 5% should be based on comparable companies. Consideration should be given to size, industry, stage of business lifecycle, and other factors that would be considered by the underwriter in pricing an underwritten offering.

The results of each assessment should be applied prospectively. In other words, if the results of a company's annual assessment reflect that the ESPP discount is now greater than the company's third-party per-share issuance costs, any subsequent grants made through the ESPP should be considered compensatory. Prior purchases under that ESPP that, at the time of grant met the criteria to be considered non-compensatory, would continue to be considered non-compensatory.

Substantially all eligible employees may participate in the ESPP on an equitable basis.

Generally, a non-compensatory plan must be open to substantially all of the company's full-time employees. However, restricting eligibility on a country-by-country or entity-by-entity basis would not result in a compensatory plan as long as all employees within each restricted country or entity are treated in the same manner.

The ESPP does not incorporate option features, including any feature that permits the employee to purchase shares at the lower of the share price on the grant date or at a later purchase date (a "look-back feature"). The following features would not be considered option features:

A plan would be considered compensatory under ASC 718 if the purchase price is not based solely on the market price of the shares at the date of purchase. For example, if a plan met all other non-compensatory criteria under ASC 718-50-25-1 but includes a feature whereby employees can acquire shares at the average trading price of the last five days, the plan would be considered compensatory because it is not based solely on the market price at the date of purchase.

If an ESPP is considered compensatory, the entire purchase discount from fair value represents employee compensation. For example, if a company estimated the per-share issuance costs for a third-party offering at 7% and offered a 15% purchase discount to employees, the entire 15% purchase discount (as opposed to just the 8% difference) is employee compensation.

For shares purchased by employees under a compensatory ESPP, companies should recognize compensation cost over the requisite service period. In general, the requisite service period begins on the enrollment date (i.e., the start of the offering period) and ends on the purchase date. See SC 5.3.2 for further discussion.