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Chapter 11 - Solution Manual

Equity instrument granted in a share based payment

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equity instrument granted in a share-based payment transaction subject to Subtopic 505-50 for the reporting entity is not considered to be a derivative instrument subject to this Subtopic by that entity during the period that the equity instrument is subject to Subtopic 505-50. 55-50Paragraphs 718-10-35-9 through 35-14 contain the concept that equity instruments that are granted in share-based payment transactions may initially be subject to that Subtopic, but after certain events or circumstances, those equity instruments may cease being subject to that Subtopic. The terms of an award that ceases to be subject to Topic 718 in accordance with paragraphs 718-10-35-9 through 35-14 should be analyzed to determine whether the award is subject to this Subtopic. 55-51Subtopic 505-50 provides guidance for accounting by the issuer for certain share-based compensation arrangements granted to nonemployees for goods and services, including guidance regarding counterparty performance commitments and conditions in share-based payment transactions. 55-52Pursuant to paragraph 815-40-15-3(c), the guidance in Subtopic 815-40 applies to contracts issued to acquire goods or services from nonemployees when performance has occurred. 55-53Thus, an equity instrument (including a stock option) granted to a nonemployee for goods and services in a share-based payment transaction would typically cease being subject to Subtopic 505-50
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246 after performance has occurred. At that point, the scope exception in paragraph 815-10-15-74(b) would no longer apply. The issuer would then need to determine whether that equity instrument meets the definition of a derivative instrument and is within the scope of this Subtopic by analyzing the terms of the instrument. The scope exception in paragraph 815-10-15-74(a) may apply. > > > > Holder's Accounting 55-54The exception in paragraph 815-10-15-74(b) does not apply to the holder of those derivative instruments. 55-55Thus, paragraph 815-10-15-75(a) explains that equity instruments (including stock options) received by nonemployees as compensation for goods and services are included in the scope of this Subtopic assuming the contract has all the characteristics of a derivative instrument. > > > Repurchase Agreements and Wash Sales 55-56Repurchase agreements and wash sales that are accounted for as sales (as described in paragraphs 860-10-55-55 and 860-10-55-57) and in which the transferor is both obligated and entitled to repurchase the transferred asset at a fixed or determinable price contain two separate features, one of which may be a derivative instrument. The initial exchange of financial assets for cash is a sale-purchase transaction— generally not a transaction that involves a derivative instrument. However, the accompanying forward contract that gives the transferor the right and obligation to repurchase the transferred asset involves an underlying and a notional amount (the price of the security and its denomination), and it does not require an initial net investment in the contract. Consequently, if the forward contract requires delivery of a
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