ASC 718 is the Financial Accounting Standards Board (FASB) standard governing stock based compensation accounting under U.S. GAAP. It explains how companies measure, record, and report compensation paid through company shares or equity-linked awards.
The standard covers employee stock options, restricted stock, restricted stock units (RSUs), performance-based awards, and qualifying share-based payments issued to nonemployees in exchange for goods or services. It may also apply to profits interests granted by limited liability companies (LLCs), depending on the awards’ terms and conditions.
ASC 718 requires companies to recognize compensation costs on their income statements, even when employees receive equity instead of cash. This helps financial statements reflect the cost of attracting and retaining talent.
ASC 718 applies to several forms of equity compensation, including:
For rsu accounting, companies generally measure awards using the underlying share value, adjusted for relevant award terms. Each award type requires evaluation of its vesting conditions and settlement provisions.
ASC 718 generally requires equity-classified awards to be measured at fair value on the grant date, when the company and recipient have a mutual understanding of the award’s key terms.
Restricted stock and RSUs are typically valued using the underlying share price, with adjustments when appropriate.
Stock options require more complex calculations. Companies commonly use the black scholes model, which considers:
Private companies may use independent valuations to establish share prices. A 409A valuation can provide supporting information, although ASC 718 and tax valuation requirements differ.
Once an award’s value is determined, companies generally recognize compensation cost over the requisite service period—the period employees must work to earn the award.
For example, a $40,000 equity-classified award vesting over four years may produce $10,000 of annual expense under straight-line attribution, assuming no forfeitures, performance conditions, modifications, or capitalization.
For service-only awards with graded vesting, companies may generally elect straight-line attribution or accelerated, tranche-by-tranche attribution, which typically recognizes more expense earlier.
Forfeitures must be estimated or recognized when they occur. Performance and market conditions, liability classification, and modifications can materially affect both the amount and timing of recognition.
Private companies face unique challenges because their shares lack publicly traded prices. They must estimate fair value using reasonable assumptions, valuation methods, and supporting documentation.
A 409A valuation may help establish the underlying share price, while certain private-company accounting alternatives can simplify other valuation inputs.
Additional considerations include:
Consistent valuation practices and accurate records help private companies prepare reliable GAAP financial statements and support future financing transactions.
ASC 718 governs how companies recognize equity compensation expenses in financial statements. Tax rules determine when recipients recognize taxable income and when employers receive deductions. An 83(b) Election can change the tax timing of eligible restricted stock without changing ASC 718 requirements.
The model uses six primary inputs: current share price, exercise price, expected option term, expected stock price volatility, risk-free interest rate, and expected dividend yield. Together, these assumptions estimate an option’s grant-date fair value for financial reporting under applicable accounting standards.
Yes. Companies may estimate forfeitures based on historical employee turnover and other relevant information, updating estimates when necessary. Alternatively, they can elect to recognize forfeitures as they occur. The selected accounting policy must be applied consistently to eligible employee awards.
Yes. ASC 718 generally measures equity-classified awards at grant-date fair value without subsequent remeasurement, absent modifications or specified exceptions. Liability-classified awards are generally remeasured each reporting period until settlement, with fair-value changes affecting compensation cost, subject to service-period and settlement rules.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Bennett Thrasher’s Business Valuation Practice, or call us at 770.396.2200.
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