Clarification Guidance in ASU 2010-01 and ASU 2010-05
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These two ASUs are very short and simply clarify current accounting guidance where the FASB and SEC have seen some variety in practice.
ASU 2010-01 – Accounting for Distributions to Shareholders with Components of Stock and Cash
ASU 2010-01 was issued in January 2010, is an update to FASC 505 - Equity and is effective immediately.
ASU 2010-01 scopes out of FASC 505-20-05, distributions or issuance to shareholders where shareholders are given an election to receive cash or shares. These types of transactions should be accounted for as new issuances of stock and added to EPS on a prospective basis.
Previously, these transactions were sometimes accounted for as stock dividends and were added to EPS on a retroactive basis. The ASU clarifies that these transactions are not stock dividends.
ASU 2010-05 – Escrowed Share Arrangements and the Presumption of Compensation
ASU 2010-05 was issued in January 2010, is an update to FASC 718 – Compensation – Stock Compensation and is effective immediately. It codifies the SEC staff’s position on when escrowed share arrangements should be treated as compensation.
An escrowed share arrangement is an arrangement between shareholders and a company or directly between shareholders and a new investor. The shareholders agree to place a portion of their shares in escrow pending the completion of specific performance-related criteria. These arrangements are generally used to facilitate an initial public offering or a capital-raising transaction.
When evaluating an escrowed share arrangement as being compensatory or not, it needs to be evaluated whether the arrangement was entered into for purposes unrelated to, and not contingent upon, continued employment. However, if the shares are automatically forfeited if employment is terminated, then the escrowed share arrangement would be considered compensatory.
If your principal officers are participating in an escrowed share arrangement, the arrangements will be considered compensatory (as if it were a reverse stock split followed by the grant of a restricted stock award) if the shares can be forfeited due to termination of employment.