What's the accounting difference between qualified and non-qualified ESPPs?

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AcadiFi · Accepted Answer

A Section 423 qualified ESPP is NON-compensatory (no expense) under ASC 718 only if ALL of these hold: (1) substantially all full-time employees participate on equitable terms, (2) discount ≤ 5%, (3) no look-back feature, (4) purchase period ≤ 27 months. If any fail, it's compensatory. Non-qualified ESPPs are almost always compensatory. Example: Halcyon Labs runs two plans. Plan A: 15% discount with 6-month look-back (purchase price = 85% of lower of start or end price). Plan B: 3% discount, no look-back, all employees. Plan A is compensatory: the 15% discount itself and the look-back option have fair value. Assume $8 fair value per share for the look-back + $2 intrinsic discount = $10 total fair value per share. With 500,000 shares expected to be purchased, annual expense = $5M, amortized over the 6-month offering period. Plan B meets all four safe harbors → zero P&L expense. IFRS (IFRS 2) has no 5% safe harbor and nearly always treats discounts as compensatory fair value. This creates US-IFRS GAAP differences in reported comp expense.

What's the accounting difference between qualified and non-qualified ESPPs?

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