As noted in SC 5.3, any cash withheld from employees in an ESPP is a liability until the arrangement is settled. The compensatory aspect of the ESPP – i.e., the value of the future optional purchases that the employee may make with the employee’s withholdings – will be classified either as a liability or within equity depending on the terms of the ESPP and the guidance in ASC 718-10-25-7 through 25-19A and ASC 480-10-25-14.

The compensatory element of an ESPP with a fixed discount percentage off the purchase date price, no look-back feature, and fixed withholdings would be liability-classified until settlement because it embodies an unconditional obligation to issue a variable number of shares for a fixed monetary amount. Unlike many liability-classified share-based awards, the value of this liability will always be equal to the fixed discount percentage in relation to the withholdings – i.e., it would not need to be remeasured to fair value. Upon settlement, the liability, which represents the consideration for the services rendered, would be reclassified to equity.

The compensatory element of an ESPP with a look-back feature would be equity classified under ASC 718-10-25-7 and ASC 480-10-25-14 as the ultimate monetary discount the employee will realize upon settlement is not fixed at the grant date and the holder is subject to the risks and rewards of equity ownership.