When Is the Grant Date Under ASC 718?
September 27, 2023
It seems like it should be easy to determine when an equity award is granted, but this can sometimes be more complicated than you might think. In this blog entry, I discuss the factors that are key to establishing when an award is granted for purposes of ASC 718.
Why Is the Grant Date Important?
It is critical to know when the grant date occurs for awards that receive equity treatment under ASC 718 because this is the date that the per-share expense for the award will be calculated. Once determined, this per-share amount does not change unless the award is modified. The aggregate amount of expense for the award might fluctuate due to expected or actual forfeitures, but the per-share expense is fixed on the grant date.
When Is the Grant Date?
The grant date for purposes of ASC 718 occurs when all four of the following conditions have been met:
- The company and the award recipient have a mutual understanding of the key terms and conditions of the award.
- The company is contingently obligated to issue equity instruments or transfer assets when the requisite services are rendered.
- The required approvals for the grant have been obtained.
- The award recipient begins to benefit from, or be adversely affected by, subsequent changes in the price of the company's equity shares.
Let's take a closer look at these conditions.
Condition #1: Mutual Understanding
An award is not considered granted under ASC 718 until both parties—the granting corporation and the award recipient—have a mutual understanding of the key terms of the award. The key terms likely include the number of shares awarded, price, and vesting and forfeiture conditions (including any performance or market conditions). They could also include other terms, such as holding periods or restrictive covenants.
It is not necessary for the grant agreement to be issued (or accepted by the recipient) for a mutual understanding of the key terms and conditions to exist. ASC 718-10-25 clarifies that a mutual understanding is presumed to exist on the date the board of directors (or other entity with the appropriate authority) approves the grant, provided the following two conditions are met:
- The grant is unilateral, and the award recipient does not have the ability to negotiate the terms and conditions of the arrangement.
- The grant is expected to be communicated to the award recipient in a "relatively short time period," defined as the period in which a company could reasonably be expected to communicate the awards under its customary practices.
There isn't a bright-line test here; you need to look at how quickly grants are normally communicated after they are approved and assess whether the grants you are currently issuing will be communicated within this same period.
The performance targets necessary to earn an award are a key condition, thus the grant date of a performance award can't occur for accounting purposes until these targets are defined. For example, let's say that a performance award will vest in three annual increments tied to earnings-per-share targets. At the start of each annual period, the compensation committee will determine the EPS target for that year. As a result, each vesting tranche will have a different grant date, which will be the date the compensation committee determines the target for that tranche.
Condition #2: Contingent Obligation
The company is contingently obligated to issue the shares underlying the award when it can no longer rescind the award without obtaining the consent of the award holder. This is a legal determination, so you may need your attorneys to help you assess it.
Condition #3: Approvals
The grant date can’t occur until all approvals necessary to effect the grant have been obtained. At a minimum this will include approval by the board, compensation committee, or other entity to which authority to approve grants has been delegated.
Where grants are contingent upon additional approval, such as shareholder approval of the plan (or an additional allocation of shares to the plan), the grant date does not occur and no expense is recognized for the grants until this approval is obtained.
Condition #4: Recipient Benefits from Stock Price Changes
The final condition for the grant date to occur is that the award recipient has to benefit from and be adversely affected by changes in the price of the underlying stock.
In a stock option, this generally doesn't occur until the exercise price is set. In both options and awards, it also likely can’t occur until the number of shares to be granted is known.
Approval Date vs. Effective Date
Sometimes grants are approved with a delayed effective date. For example, the compensation committee might approve the grant on March 1 but stipulate that the grant isn’t effective until March 15.
In this scenario, the timing of when the grants will be communicated to the recipients will be important to establishing the grant date. Will the grants be communicated shortly after the approval on March 1 or will the communication occur after the effective date on March 15? A two-week (or longer) delay in communicating the grants after they are approved might mean that a mutual understanding of the key terms doesn’t exist on March 1. This would delay the grant date until the date the grants are communicated to the recipients. But this would depend on when grants are communicated under the company’s standard practices: if it normally takes two weeks or longer to notify recipients of their grants, a mutual understanding might exist on March 1.
It is also necessary to evaluate when the company becomes contingently obligated to issue the shares underlying the award. Does this obligation accrue on March 1 or March 15?
If this is an option, it’s likely that the exercise price won’t be set until the effective date, in which case the grant date can’t occur until then. Likewise, for both options and awards, if the number of shares that will be granted is determined on the effective date (i.e., if the comp committee simply approved the aggregate value to be awarded and the formula to be used to denominate the value into shares), the grant date likely does not occur until then.
What About the Grant Date for Other Purposes?
The principles under ASC 718 apply only for accounting purposes. For other purposes, such as tax and securities law, it is necessary to look at the guidance that exists in those areas. In some cases, an award might have a different grant date for accounting purposes than it does for tax or securities law purposes. Here is a quick summary of the key principles.
Tax: An award can be considered granted once the corporate action necessary to effect the grant has been completed. Where an agreement specifies a later effective date, the effective date would likely be considered the grant date.
Section 16: In most cases, the date of grant is the date on which the rights and obligations of the issuer and the insider become fixed. But for awards in which vesting is contingent on any performance condition other than a stock price target, the award is not considered granted until the performance condition is achieved. See “Form 4 Reporting for Performance Awards.”
Executive Compensation Disclosures: For purposes of the Summary Compensation Table and the Grants of Plan-Based Awards Table, the grant date is generally the same as the grant date under ASC 718. But awards that have been approved may need to be discussed in the CD&A, even if they are not yet considered granted for purposes of the tabular disclosures.
Multiple Grant Dates
Because the determination of grant date can vary for accounting, tax, and securities law purposes, a single grant could have different grant dates for each of these purposes. Let's take our earlier example of a performance award that vests in three annual increments tied to EPS, with the EPS target for each vesting increment set by the compensation committee at the start of the year. This award would have the following grant dates:
- Accounting: As noted above, for accounting purposes, each tranche will have a different grant date, which would be the date the compensation committee determines the EPS target for the tranche.
- Tax: For tax purposes, however, the grant date will be the date that the compensation committee approves the issuance of the grant. The delay in setting the performance targets doesn't affect the grant date for tax purposes.
- Section 16: For Section 16 purposes, the grant date is the date the performance conditions are met. Here again, each tranche will have a different grant date, which will differ from the three grant dates for accounting purposes.
- Executive Compensation Disclosures: For purposes of the Summary Compensation Table and the Grants of Plan-Based Awards Table, the award grant dates will align with the grant dates determined for accounting purposes. But the awards should be discussed in the CD&A for the year in which issuance of the grant is approved by the compensation committee.
Are you keeping score? That's six or seven different grant dates for just one award! (Five if the comp committee determines the target for the first tranche when it approves the grant; six if the target for the first tranche is determined subsequent to when the grant is approved.)
Can the Grant Date Occur Before the Grant Is Approved?
Generally, no, this isn't permissible. From an accounting standpoint, having all the necessary approvals in place is a requirement for the grant date to occur. There is an exception if approval is a mere formality--for example, if the compensation committee is approving grants to themselves--but the bar for this is pretty high, so it rarely applies.
From a tax standpoint, as noted above, the grant generally occurs when the corporate action (i.e., approval by the authorized entity) necessary to effect the grant has been completed. As a result, the grant date can't occur prior to when the grant is approved.
For Section 16 purposes, it is unlikely that the rights and obligations of the issuer would be deemed to be fixed prior to when the grant is approved, thus the grant date generally can't occur until then.
This question often comes up when an employee is inadvertently omitted from the list of grant recommendations submitted for approval to the compensation committee and the error isn't discovered until after the grants are approved (sometimes weeks or months later). It generally isn't permissible to backdate the grant in this situation but there are other solutions to compensate the employee for the oversight. See the blog "Fixing Mistakes: What to Do About Missed Grants" to learn more.
For more information on grant date under ASC 718, including what the service inception date is and how it relates to the grant date, see section 3 of the NASPP resource "Accounting for Equity Compensation in the United States.”