Justified Wages Inc. (the “Company”) is a privately held provider of cloud-based
software platforms for the Internet of Things (IoT). The Company enables product
businesses to become IoT service businesses, and helps organizations launch, manage,
and monetize the deployment of IoT worldwide.
In November 2012, the Company secured financing of $40 million from an independent
investor, Well-to-Do Inc. (WTD), in exchange for the following:
• $30 million for the issue of a new series of its Series E Preferred Stock (Preferred
Stock), and
• $10 million for the sale of its shares of common stock (“Common Stock”).
The purchase of the Preferred Stock and Common Stock were executed within the same
transaction. Thus, WTD paid the same value per share for the Common Stock as it did for
the Preferred Stock. This is a common practice among venture capitalists.
The Company had previously awarded common stock to employees as share-based
compensation. As required by the terms of the financing agreement, the Company
conducted a tender offer to repurchase an aggregate of $10 million of common stock
from its current employees at a per-share price of $4.68. The common stock reacquired
from the employees was then sold by the Company to WTD for a like amount of
$10 million. The purchase price of $4.68 was independently negotiated with WTD. The
Company acted as a principal in both transactions with WTD and the employees. That is,
the Company did not act as an agent to purchase shares from employees on behalf of
WTD.
On the basis of an independent third-party valuation, the Company concluded that the
purchase price paid to the employees ($10 million) exceeded the fair value of common
stock by $2.6 million.
ASC 718-20-35-7 states, in part:
The amount of cash or other assets transferred (or liabilities incurred) to repurchase an
equity award shall be charged to equity, to the extent that the amount paid does not
exceed the fair value of the equity instruments repurchased at the repurchase date. Any
excess of the repurchase price over the fair value of the instruments repurchased shall be
recognized as additional compensation cost.
Pursuant to the guidance above, the Company recorded a debit to treasury stock and
expense in the amounts of $7.4 million (representing the fair value of the common stock)
and $2.6 million (representing the excess of purchase price over fair value), respectively,
and a credit to cash.
Case 17-8: Justified Wages Page 2
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Required:
1. Should the $10 million paid to employees and the $10 million received from
WTD be presented gross or net in the Company’s statement of cash flows?
2. How should the Company classify the cash received and paid in its statement of
cash flows?
3. Does the accounting analysis or conclusion change for each of the questions
above when analyzed in accordance with IFRSs?