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Overview and scope“nonvested shares” because the employees must satisfy certain vesting conditions to earnthe rights to the shares, which are, in general, otherwise unrestricted as to transfer. See SC2.2.4 for further discussion.o Stock appreciation rights (SARs)o Designed to promote employee stock ownership by providing employees with aconvenient means (usually through a payroll deduction) to acquire a company’s shares.Refer to SC 5 for information on ESPPs.Employee stock ownership plans (ESOPs)o A contract that gives the employee the right to receive an amount of stock or cash, thevalue of which equals the appreciation in a company’s stock price between the award’sgrant date and its vesting/exercise date. SARs generally do not involve payment of anexercise price. Regardless of the form of settlement, SARs are subject to the guidance inASC 718.Employee stock purchase plans (ESPPs)o Restricted stock units (RSUs) represent a promise to deliver shares to the employee at afuture date if certain vesting conditions are met. The difference between RSUs andrestricted stock is primarily the timing of the delivery of the underlying shares. A companythat grants RSUs does not deliver the shares to the employee until the vesting conditionsare met.A qualified stock bonus plan, or a combination stock bonus and money purchase pensionplan, that is designed to invest primarily in employer stock, and that meets therequirements of the Employee Retirement Income Security Act of 1974 and the InternalRevenue Code. Refer to SC 11 for information on ESOPs.Long-term incentive plans (LTIPs)oGenerally, LTIPs are cash-settled plans that reward employees based on a company’sperformance over a number of years. LTIPs are within the scope of ASC 718 if the amountearned by the employees is based, even in part, on the price of the company’s stock orother equity instruments. For example, an employee may be entitled to a cash payment ifthe company’s stock price reaches a specified target price or total shareholder return atthe end of five years. Cash-settled LTIPs that have payout triggers linked only to employeeservice (i.e., time-based vesting) or internal performance conditions (e.g., sales or EBITDAtargets) are not within the scope of ASC 718 because they are not tied to the price of thecompany’s stock.ASC 718 applies to both public and nonpublic companies; although ASC 718 provides nonpubliccompanies certain alternatives that are not available to public companies (see SC 6). ASC 718 includesa definition of a public company.Excerpt from ASC 718-10-20Public entity: An entity (a) with equity securities that trade in a public market, which may be either astock exchange (domestic or foreign) or an over-the-counter market, including securities quoted onlylocally or regionally, (b) that makes a filing with a regulatory agency in preparation for the sale of anyclass of equity securities in a public market, or (c) that is controlled by an entity covered by (a) or (b).1-4

Overview and scopeThis definition focuses solely on equity securities. Therefore, a company that has publicly traded debtand no publicly traded equity securities would not be a public entity for purposes of applying ASC 718.Once a company files for an initial public offering of equity securities (e.g., the date the initialprospectus is filed with the SEC), it is considered a public company. We believe this would include acompany that has made a confidential submission of financial statements to the SEC under the JOBSAct in anticipation of a public offering of equity securities. A company whose equity securities aretraded on “Pink Sheets” is also considered a public company. The “Pink Sheet” market is a form ofover-the-counter trading. It is not an exchange, but stock price quotations are available to any investorwho subscribes to the National Quotation Bureau’s Pink Sheet service. Thus, an entity with equitysecurities traded in this manner, even if not required to make periodic filings with the SEC, wouldmeet the ASC 718 definition of a public entity.The following entities would also be considered a public entity under the definition in ASC 718 becausethey are controlled by an entity with equity securities that trade in a public market: A US subsidiary of a parent company whose equity securities are publicly traded in a non-USjurisdiction. A subsidiary (Company A) that does not have publicly-traded equity securities but is controlled bya private equity fund (Fund) that in turn is controlled by a public company (Company B) withpublicly traded equity securities. Company B accounts for its investment in Fund at fair value (inaccordance with the Investment Company Act of 1940) rather than consolidating Fund and itscontrolled subsidiaries, including Company A. In this scenario, Company A would be considered apublic entity under ASC 718. A limited liability partnership (LLP) that does not have publicly-traded equity securities but isconsidered a variable interest entity under ASC 810, Consolidation, and is subject to consolidationby another entity (Company C) that is the primary beneficiary of the LLP and that has publiclytraded equity. Due to the LLP being consolidated by Company C under ASC 810, the LLP isconsidered to be controlled by a public entity. Therefore, the LLP would meet the definition of apublic entity under ASC 718. A joint venture formed by two companies, Company X and Company Y. Company X has publiclytraded equity securities; Company Y does not. If the joint venture is consolidated by Company Xand accounted for under the equity method by Company Y, the joint venture would be considereda public entity under ASC 718. However, if the joint venture is consolidated by Company Y andaccounted for under the equity method by Company X, the joint venture is not a public entityunder ASC 718.The FASB codification contains multiple definitions of “public entity,” “public business entity,”“publicly traded company,” and “nonpublic entity.” Each of these definitions was developed at adifferent time and in the context of specific standards. An entity that fails to meet the definition of apublicly traded company or public entity under the definitions in other standards may still be a “publicentity” under the ASC 718 definition, and vice versa.1-5

Overview and scope1.4Awards by related parties and other economicinterest holdersIn addition to grants by their employer, employees may earn awards granted by other parties. Todetermine which awards are subject to ASC 718, companies should consider awards granted by relatedparties or other holders of an economic interest, which includes any person or entity that has afinancial interest in the company (e.g., via equity or debt securities, or certain contractualarrangements). Under ASC 718-10-15-4, if a related party or other economic interest holder of thecompany grants an employee of the company an instrument that falls within the scope of ASC 718, thattransaction should be accounted for by the company as stock-based compensation. These types ofawards are commonly granted in holding company situations, where equity of another entity within aholding company structure is issued to employees of the reporting entity. However, such awards arenot limited to these situations.For example, if an investor transfers some of its shares to an employee for no consideration, it wouldbe accounted for as if the investor granted the shares on behalf of the company unless the transactionis clearly for a purpose other than compensation for services provided by the employee to thecompany. The substance of the transaction is that the investor is making a capital contribution to thecompany, and the company, in turn, is making a share-based payment to its employee in exchange forservices. Thus, the company would record a capital contribution from the investor and compensationcost for the value of the shares transferred to the employee.The same considerations would apply to grants of stock options and any other share-based paymentawards, whether indexed to the company’s stock or the economic interest holder’s stock (although inthis latter case, the awards may be considered to be based on the equity of another entity subject to theguidance in ASC 815, Derivatives and Hedging). See SC 1.6 for discussion of awards issued amongentities within a consolidated group and SC 7.2.8 for considerations when an equity method investorissues share-based payment awards indexed to the investor’s stock to employees of the equity methodinvestee.ASC 718’s definition of a related party is consistent with the definition in ASC 850, Related PartyDisclosures. However, ASC 718’s definition of other economic interest holders includes a broaderarray of individuals and entities whose awards to a company’s employees would be subject to ASC 718because it includes parties that hold any form of financial interest in the company.1.5Definition of an employee under ASC 718Although the accounting for employee and nonemployee awards has been largely aligned under ASC718 upon adoption of ASU 2018-07, some differences remain. In particular, the attribution of cost andmeasurement of instruments awarded to employees can differ from instruments awarded tononemployees. Therefore, it is important to determine whether the recipient of an award is an“employee” under ASC 718. Refer to SC 7 for further discussion of nonemployee awards. Throughoutthis guide, we generally refer to awards as employee awards; however, unless indicated otherwise,most of the guidance would be equally applicable to both employee and nonemployee awards giventhat ASU 2018-07 eliminated many of the differences.ASC 718-10-20 defines an employee as someone over whom the grantor of a stock-basedcompensation award exercises or has the right to exercise sufficient control to establish an employer-1-6

Overview and scopeemployee relationship based on common law. All other individuals (aside from the exceptionsdescribed below) who receive stock-based compensation should be considered nonemployees.1.5.1Awards to members of a board of directorsA nonemployee who sits on the board of directors and is compensated by the company solely for theindividual’s role as a director will be treated as an employee under ASC 718 if the individual has been: Elected by the company’s shareholders, or Appointed to a board position that will be filled by another person whom the shareholders willelect when the current term expires.Accordingly, an award granted to a nonemployee director should be accounted for as an award grantedto an employee, so long as the award to the nonemployee director is in return for services providedsolely in the person’s capacity as a director. However, an award granted to such a director for nonboard services should be accounted for as a nonemployee transaction.The exception for nonemployee directors does not extend to independent contractors or advisoryboard members (e.g., board members that function in a consulting capacity, provide legal services, orgive scientific advice) because, typically, such individuals are not elected by a company’s shareholders.Any instruments granted in exchange for nondirector services should be accounted for as anonemployee transaction and disclosed as a related-party transaction in the company’s financialstatements, in MD&A, and in the proxy statement.Subsidiary entities in a consolidated group may have separate boards of directors. In general, onlythose outside directors on the board of the parent company are considered employees. However, to theextent that nonemployee directors on the board of a consolidated subsidiary are elected byshareholders of the subsidiary that are not controlled, directly or indirectly, by the parent or anothermember of the consolidated group, then those directors would also be considered employees underASC 718 (e.g., when a subsidiary of a public company is a public company itself) in the consolidatedfinancial statements. In the separate financial statements of the subsidiary, members of thesubsidiary’s board of directors elected by the subsidiary’s shareholders, regardless of whether they areindependent shareholders or the parent shareholder, would be considered employees.1.5.2Awards to leased and part-time employeesUnder the ASC 718 definition of an employee, the primary consideration is whether or not theindividual is considered an employee under common law. A leased individual must also be a commonlaw employee, but the definition of an employee in ASC 718-10-20 includes additional criteria thatneed to be met for a leased individual to be considered an employee, including that the leasedindividual be eligible to participate in the lessee’s employee benefit plans, the lessee has the exclusiveright to determine the economic value of the services performed by the lessee (including wages and thenumber of units and value of stock compensation granted), and the lessee has the right to hire, fire,and control the activities of the individual. If an individual does not meet those criteria, the individualwould be considered a nonemployee.Part-time employees generally meet ASC 718’s definition of an employee because they are consideredemployees under common law.1-7

Overview and scope1.5.3Awards to employees of a pass-through entityWe believe that the share-based payments awards of a pass-through entity should generally beconsidered employee awards if the grantee qualifies as a common law employee. The fact that thepass-through entity does not classify the grantee as an employee for payroll tax purposes is generallynot relevant given the combined service and ownership relationship of owners in a pass-through entity(e.g., a partnership or a limited liability company). For guidance on the determination of whether anaward granted by a pass-through entity is akin to equity and therefore a share-based payment awardin the scope of ASC 718, see SC 6.7.1.6Awards to employees of subsidiary or unconsolidatedentityEmployees of a subsidiary that is included in the parent company’s consolidated financial statementsare considered employees of the parent company for purposes of applying ASC 718.Under ASC 718, the employees of an unconsolidated entity’s (e.g., equity method investees, jointventure) who are granted an instrument in the investor company’s equity are not consideredemployees of the investor company. This conclusion would also apply to awards granted by a companyto former employees of the company who are now employed by an unconsolidated joint venture of thecompany. See additional discussion in SC 7.2.8 on accounting by an investor for stock-basedcompensation granted to employees of an equity method investee.When an entity grants awards of other entities’ equity to its employees, including, for example, anequity method investee granting its investor’s equity to the investee’s employees, ASC 718 does notapply because the awards are not the equity of the granting company. The investee company wouldfollow the guidance in ASC 815, Derivatives and Hedging (ASC 815-10-55-46 through ASC 815-10-5548) for these awards.Example SC 1-1 illustrates the accounting for awards granted to companies under common control aspart of a consolidated group.EXAMPLE SC 1-1Awards granted to employees of companies under common controlParent is a company with two consolidated subsidiaries, Sub Z and Sub Y. During the year, thefollowing stock-based compensation is granted:Scenario 1: Parent grants equity in Parent to Sub Z’s employeesScenario 2: Sub Z grants equity in Sub Z to Parent’s employeesScenario 3: Sub Z grants opti0ns to purchase Sub Z’s shares to employees of Sub YScenario 4: Parent grants awards indexed to the price of Parent’s stock that can be settled, at theemployee’s direction, in cash (by Parent) to employees of Sub Z1-8

Overview and scopeHow should the awards be reflected in the financial statements of Parent and its subsidiaries?AnalysisScenario 1: Parent grants equity in Parent to Sub Z’s employeesParent consolidated financialstatementsSub Z separate financial statementsAwards would be measured at fair value onthe grant date and accounted for as awardsgranted to an employee, as defined by ASC718.Awards would be accounted for under ASC718. Sub Z would recognize compensationcost at grant date fair value. If Sub Z doesnot provide any consideration to Parent forthe awards, the value of the awards grantedto Sub Z’s employees would be considered acapital contribution from Parent (i.e.,compensation cost with an offsetting entryto capital contribution within equity).Scenario 2: Sub Z grants equity in Sub Z to Parent’s employeesSub Z separate financial statementsParent consolidated financialstatementsThe equity grant would be measured at fairvalue on the grant date and recognized as adividend to Parent because, as thecontrolling entity, Parent could require SubZ to grant the awards to Parent’semployees, even though they are notrendering any services to Sub Z.The equity grant would be accounted for asemployee awards, as defined by ASC 718.Awards of subsidiary equity representequity (non-controlling interest) in theconsolidated entity.Scenario 3: Sub Z grants opti0ns to purchase Sub Z’s shares to employees of Sub YParent consolidated financial statementsThese awards would be accounted for in Parent’s consolidated financial statements as employeeawards. This is substantively the same as Scenario 2.Sub Z separate financial statementsSub Y separate financial statementsThe options would generally be measuredat fair value on the grant date andrecognized as a dividend to Parent because,as the controlling entity, Parent couldrequire Sub Z to grant the options to SubY’s employees.The grant of Sub Z’s options to theemployees of Sub Y would generally beconsidered awards based on the equity ofanother entity. Under this view, the awardswould be accounted for in accordance withASC 815-10-55-46 through ASC 815-10-5548 with the change in fair value measuredeach reporting period and recognized ascompensation cost. As the awards areprovided to Sub Y by Parent (throughNotwithstanding the general model, incertain circumstances it may beappropriate to account for such awards as1-9

Overview and scopenonemployee awards and recognize theexpense in the grantor’s standalonefinancial statements provided it is clearthat the grantor is receiving services inexchange for the award.Parent’s direction of Sub Z to issue theawards), the change in fair value would beconsidered a capital contribution andrecognized as an increase or decrease inParent’s equity in Sub Y’s standalonefinancial statements.Scenario 4: Parent grants awards indexed to the price of Parent’s stock that can be settled, at theemployee’s direction, in cash (by Parent) to employees of Su

Discussion on accounting for the employer's portion of payroll taxes on employee stock compensation was moved from PwC's Income taxes guide (TX 17.3.2) to SC 10.7.3. Revisions made in September 2021 SC 1, Stock-based compensation overview and scope