Search within this section
Select a section below and enter your search term, or to search all click Stock-based compensation
Favorited Content
6.4 Book value plans / formula value plans
Publication date: 29 Feb 2024
us Stock-based compensation guide
A book value or formula value plan is a stock-based compensation plan where the purchase price is determined by a stated formula based on a company's current book value, or some other formula. Some closely held nonpublic companies maintain a book value plan as a way to compensate employees without giving up voting rights. Most book value plans also require the employee to sell the shares back to the company after termination at a price determined by the same formula.
A book value plan should be reviewed to determine if (1) awards under the plan are compensatory and (2) the award's features, including repurchase features, require the award to be classified as a liability.
6.4.1 Determining if the book value plan award is compensatory
Employers using book value plans generally issue shares, not options. If an employee acquires shares under a book value plan on the same terms (including price) available to all other shareholders of the same class of stock and at the formula price based on the current book or formula value, the transaction is not compensatory. Essentially, the formula price represents the relevant transaction price for those shares and the transaction is the sale of a share of stock at that price. Accordingly, no compensation would be recorded.
To the extent an employee pays less than the then-current formula price to acquire the shares or receives more than the then-current formula price upon a negotiated repurchase of the shares, compensation cost should be recorded for the difference. If a company with a book value plan issues options, compensation cost should be recorded unless the employees pay an amount that is essentially equivalent to the fair value of the options (based on the formula price for the shares and the terms of the option).
To obtain noncompensatory accounting treatment for awards issued by a book value plan, the book value features should apply to all shares within a given class of stock. If there are transactions at a different price in the same or a similar class of stock, such transactions may establish a value for the shares at an amount other than the formula price. In these situations, compensation cost should be recognized for the difference between the price paid by the employee for the shares and the fair value of the shares.
See ASC 718-10-55-131 through ASC 718-10-55-133 for an example of a book value plan. Fact patterns that are not consistent with this example likely do not meet the requirements to be accounted for as noncompensatory.
6.4.2 Determining if the book value plan award is a liability
Awards issued under book value plans need to be assessed to determine whether they include any features that would require liability classification (refer to SC 3). For example, repurchase features should be assessed to determine whether the employee bears the risks and rewards of ownership for at least six months (refer to SC 3.3.3).
Many book value plans have mandatory redemption features that require the shares to be redeemed upon an employee's termination of service or death at the then-current formula price. These features do not preclude equity classification if the company qualifies for the ASC 480 scope exception discussed in SC 6.3. However, to qualify for equity classification, the employee must bear the risks and rewards of equity ownership for at least six months. If such an award does not require the employee to hold the share for at least six months prior to the mandatory redemption, the award would be liability classified for the period from the grant date (or original purchase date) until six months after vesting.
If the shares within the book value plan are always transacted at the formula price, that price effectively represents the relevant transaction price for those shares. Thus, a repurchase right with a price equal to the then-current formula price does not necessarily prevent the employee from bearing the risks and rewards of equity ownership. However, if there are transactions at a different price in the same or a similar class of stock, such transactions may establish a value for the shares at an amount other than the formula price. In these situations, a formula price repurchase right would generally result in liability accounting.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
