Share-Based Compensation: ASPE 3870

Overview of Share-based Compensation under ASPE 3870

Share-based compensation (SBC), governed by ASPE 3870, occurs when an entity compensates its employees by granting them company shares. This is classified as an equity-settled transaction. Alternatively, employees may receive bonuses that are determined based on the company's share price, which are classified as cash-settled transactions.

Non-employee transactions also fall under this standard. These occur when a company pays for goods or services through the issuance of shares, which is another form of equity-settled compensation specified for non-employees. Within the context of Accounting Standards for Private Enterprises (ASPE), share-based compensation is generally less common because private companies are less likely to utilize these methods of compensation compared to public entities.

Stock Option Accounting for Non-Employees

The recognition of stock options for non-employees is addressed under ASPE 3870.10. The accounting treatment for these transactions is determined based on who is receiving the compensation.

Entities that grant equity instruments or incur liabilities to non-employees based on the price of the enterprise's stock through a non-reciprocal transfer must account for the transaction using the fair value of the equity instruments or the fair value of the liabilities incurred, depending on the specific circumstances of the grant.

Employee Stock Options: Recognition and Measurement Standards

The recognition and measurement of equity instruments awarded to employees are governed by several key provisions within ASPE 3870:

  • General Measurement Principle (ASPE 3870.24): Equity instruments awarded to employees, and the subsequent cost of the services received as consideration, must be recognized and measured based on the fair values of the equity instruments.
  • Measurement Objective (ASPE 3870.30): The goal of the measurement process is to estimate the fair value of the stock options or other equity instruments to which the employee becomes entitled. This estimate is based on the stock price at the grant date. Consequently, employee stock options are measured at fair value (F.V.F.V.) specifically at the grant date.
  • Subsequent Adjustments (ASPE 3870.34): The fair value of the option estimated on the grant date is fixed for accounting purposes. It is not subsequently adjusted to reflect changes in the price of the underlying stock. Essentially, employee stock options are never revalued after the initial grant date measurement.

Allocation of Compensation Costs and Vesting

ASPE 3870 provides specific instructions on how to recognize the cost of employee services over time:

  • Recognition Period (ASPE 3870.487): The compensation cost for stock-based awards must be recognized over the period in which the related employee services are rendered. This is recorded as a charge to compensation cost.
  • Vesting Period: If the award is granted for future service, the total cost must be allocated over the vesting period.
  • Vesting Estimates (ASPE 3870.467): At the grant date, an enterprise has the option to base its accruals of compensation on the best estimate of the number of options or equity instruments that are expected to vest. This estimate should be revised if subsequent information indicates that the actual number of instruments likely to vest has changed. This estimation approach is particularly relevant when a percentage of grants are expected to vest, but that percentage is not 100%100\%.

Share Appreciation Rights and Cash-Settled Awards

When awards call for settlement in cash or other assets, they are categorized differently than equity-settled options. Share Appreciation Rights (SARs) are a primary example of this.

  • Measurement of Cash Settlements (ASPE 3870.37): For awards such as stock appreciation rights that involve cash settlement, compensation cost is measured by the amount by which the quoted market value of the shares exceeds the option price (also referred to as the specified price).
  • Liability Classification (ASPE 3870.387): An award for stock appreciation rights that requires settlement in cash is classified as an indexed liability.
  • Measurement and Settlement Date: The formal measurement date for these awards is the settlement date, or the date of exercise.
  • Ongoing Remeasurement: Unlike equity-settled options, the liability for cash-settled SARs must be remeasured at every reporting period. This results in an expense that will change annually based on fluctuations in the market value of the underlying stock.