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SC 3.3.3 discusses the accounting guidance for public and nonpublic companies that grant awards with repurchase features including mandatorily redeemable financial instruments. The guidance for most repurchase features is the same for public and nonpublic companies; however, the guidance on mandatorily redeemable financial instruments in ASC 480, Distinguishing Liabilities from Equity, specifically excludes from its scope certain awards issued by companies that are nonpublic companies that are not SEC registrants or controlled by SEC registrants.
The definition of a nonpublic company is the same under ASC 480 and ASC 718. For example, an entity with publicly traded debt securities is considered a nonpublic company under ASC 480-10-20 and ASC 718-10-20, but is an SEC registrant and therefore, would not qualify for the scope exclusion.
The scope exclusion in ASC 480 allows equity classification for shares that are required to be redeemed upon an employee's termination of service or death at fair value on the redemption date. However, all other requirements for equity classification in ASC 718 need to be met, including the requirement that the employee bear the risks and rewards of equity ownership for a reasonable period of time (i.e., hold the share for at least six months), as discussed in ASC 718-10-25-9. Such instruments are considered mandatorily redeemable under ASC 480 because termination of services and the death of the holder are events that are certain to occur. Either a mandatorily redeemable share or an option that would be settled upon exercise by issuing a mandatorily redeemable share that is subject to the exclusion, would be classified as equity (assuming that the option meets all other requirements for equity classification under ASC 718).
For redeemable awards that are accounted for as equity, it may still be necessary to record an amount outside of permanent equity (i.e., as temporary equity in the mezzanine section of the balance sheet). See SC 3.3.10. Although the requirements discussed in that section apply to SEC registrants, we believe non-SEC registrants should follow the same classification treatment.
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