Chapter 11 - Solution Manual

55 42paragraph not used scope application to certain

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55-42[Paragraph not used] > > Scope Application to Certain Contracts 55-43This guidance illustrates the application of Section 815-10-15 in the following situations: a. Contract with payment provision b. Credit derivatives c. Equity options issued to employees d. Equity instruments (including options) issued to nonemployees e. Repurchase agreements and wash sales f. Short sales (sales of borrowed securities) g. Take-or-pay contracts. > > > Contract with Payment Provision 55-44If the contract contains a payment provision that requires the issuer to pay to the holder a specified dollar amount based on a financial variable, the contract is subject to the requirements of this Subtopic.
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245 > > > Credit Derivatives 55-45Many different types of contracts are indexed to the creditworthiness of a specified entity or group of entities, but not all of them are derivative instruments. Credit-indexed contracts that have certain characteristics described in paragraph 815-10-15-58 are guarantees and are not subject to the requirements of this Subtopic. Credit-indexed contracts (often referred to as credit derivatives) that do not have the characteristics necessary to qualify for the exception in that paragraph are subject to the requirements of this Subtopic. One example of the latter is a credit-indexed contract that requires a payment due to changes in the creditworthiness of a specified entity even if neither party incurs a loss due to the change (other than a loss caused by the payment under the credit-indexed contract). > > > Equity Options Issued to Employees 55-46Some entities issue stock options to their employees in which the underlying shares are stock of an unrelated entity. Consider the following example: a. Entity A awards an option to an employee. b. The terms of the option award provide that, if the employee remains employed by Entity A for 3 years, the employee may exercise the option and purchase 1 share of common stock of Entity B, a publicly traded entity, for $10 from Entity A. c. Entity B is unrelated to Entity A and, therefore, is not a subsidiary or accounted for by the equity method. 55-47The option award in this example is not within the scope of Topic 718 because the underlying stock is not an equity instrument of the employer-grantor. 55-48The option award is not subject to Topic 718. Rather, the option award in the above example meets the definition of a derivative instrument in this Subtopic and, therefore, should be accounted for by the employer as a derivative instrument under this Subtopic. After vesting, the option award would continue to be accounted for as a derivative instrument under this Subtopic. > > > Equity Instruments (Including Options) Issued to Nonemployees > > > > Issuer's Accounting 55-49For the issuer, equity instruments (including stock options) that are granted to nonemployees as compensation for goods and services in share-based payment transactions are subject to this Subtopic once performance has occurred (as discussed in Subtopic 505-50) and provided that the scope exception in paragraph 815-10-15-74(a) does not apply. From the perspective of the issuer, equity instruments
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