Two parts of ASC 718 generate most of the adjusting entries on a stock compensation file: how expense is spread across a graded vesting schedule, and what happens when the terms of a granted award change. Grant-date measurement is covered in /us/blog/asc-718-stock-compensation-private-companies. This guide goes further on the mechanics, with illustrative numbers that are round and small so the arithmetic can be checked by hand.
How does graded vesting attribution work?
A graded award vests in tranches. Economically it behaves like a series of separate awards with different cliff dates. For an award with only a service condition, ASC 718-10-35-8 lets the company choose one of two policies and apply it consistently to graded-vesting awards with service conditions only (KPMG):
- Graded (accelerated) method. Each tranche is its own award, so expense is front-loaded.
- Straight-line method. Total cost is recognized evenly over the requisite service period of the last tranche.
If the award does not qualify for the policy election, for example because it has a performance condition, compensation cost is recognized tranche by tranche (KPMG). An award that accelerates on a change in control or IPO can still use straight-line when the acceleration is a protective feature, because the event only accelerates vesting and is not otherwise required for the award to vest (KPMG).
Illustration: 40,000 options, $5 grant-date fair value each, so $200,000 total cost. They vest 25 percent a year over four years with a service condition only. (The per-tranche values are held equal to keep the arithmetic simple.)
| Year | Graded expense | Share of total | Straight-line expense |
|---|---|---|---|
| 1 | 104,167 | 52% | 50,000 |
| 2 | 54,167 | 27% | 50,000 |
| 3 | 29,167 | 15% | 50,000 |
| 4 | 12,500 | 6% | 50,000 |
The graded year 1 figure is the sum of the first-year share of each tranche: $50,000, plus $25,000 (half of tranche 2), plus $16,667 (a third of tranche 3), plus $12,500 (a quarter of tranche 4).
| Account | Debit | Credit |
|---|---|---|
| Stock compensation expense | 104,167 | |
| Additional paid-in capital (equity-classified awards) | 104,167 |
What is the floor rule?
Under either method, cumulative expense at any date must at least equal the grant-date fair value of the portion that is vested by that date. It bites on front-loaded schedules. Illustration: $120,000 of restricted stock vests 50, 25 and 25 percent over three years. Straight-line would give $40,000 by the first anniversary, but half the award has vested, so cumulative cost must be at least $60,000. The extra $20,000 is recognized by that date, either by anticipating the floor during the vesting period or by a catch-up adjustment at the vesting date, as a consistently applied policy election (KPMG).
How are modifications classified?
A change in the terms of an award is a modification. For awards with service or performance conditions, the accounting turns on whether vesting is probable immediately before and immediately after the change, assessed at the modification date with a documented, consistent method.
| Type | Before and after | Cost |
|---|---|---|
| I | Probable to probable | Original grant-date fair value (the floor) plus any incremental fair value |
| II | Probable to improbable | Grant-date fair value if the award vests under either the original or the modified condition; nothing if neither is met. KPMG notes these are rare |
| III | Improbable to probable | Full modification-date fair value, recognized over the remaining service period; total cost can be below the original grant-date value |
| IV | Improbable to improbable | Nothing at modification; if vesting later becomes probable, the modification-date fair value |
Incremental fair value is the fair value of the modified award minus the fair value of the original award immediately before the change. For Types III and IV, the original award is treated as worth zero. A nonpublic entity that cannot reasonably estimate expected volatility uses calculated value in place of fair value (KPMG, ASC 718-10-30-20).
Worked entry: repricing unvested options
A repricing does not change the probability of vesting. Recognize the incremental value plus the remaining unrecognized original cost over the remaining service period.
Illustration: 100,000 unvested options were granted at a $6 fair value each, vesting after three years of service. After year 1, $200,000 is recognized and $400,000 remains. The company cuts the exercise price from $20 to $14. Immediately before the change the original options are worth $4. The modified options are worth $5.50.
- Incremental value: ($5.50 - $4.00) x 100,000 = $150,000.
- Remaining cost: $400,000 + $150,000 = $550,000, over two years, or $275,000 a year.
| Account | Debit | Credit |
|---|---|---|
| Stock compensation expense | 275,000 | |
| Additional paid-in capital | 275,000 |
Worked entry: Type III modification
A company has 10,000 restricted shares that vest only if sales reach a target management does not expect to hit. The board lowers the target to a level management now expects to meet. Fair value at the modification date is $9 a share, and two years of service remain. Prior cost is zero, so the incremental cost is the full $90,000, recognized prospectively.
| Account | Debit | Credit |
|---|---|---|
| Stock compensation expense (each of two years) | 45,000 | |
| Additional paid-in capital | 45,000 |
Which common changes are modifications?
- Extending the exercise period of vested options on termination is a probable-to-probable (Type I) modification. When the longer period raises the fair value, the incremental value is recognized immediately for vested options and over the remaining service period for unvested options (KPMG).
- Accelerating or continuing vesting of unvested awards that would have been forfeited is generally a Type III modification, measured at the modified award's fair value.
Audit angle
What the auditor tests:
- The attribution policy. Confirm the election is documented, matches the award terms and is applied to similar awards. Awards that do not qualify for the election, such as those with performance conditions, should not be on straight-line.
- The floor. Recompute cumulative cost against the vested portion at each period end for front-loaded schedules.
- Modification inventory. Ask for board and compensation committee minutes, amended award agreements and termination agreements. Every amendment, extension and acceleration needs a classification: Type I to IV, or no modification.
- Probability. For Types II to IV, obtain management's probability analysis at the modification date and challenge it against budgets.
- Valuation at the modification date. Agree inputs to the original valuation and to support from a specialist where used; see /us/blog/409a-valuation-guide-for-cpas and /us/standards/au-c-540.
- Termination packages. Test each departure in the year for an extension or acceleration.
Common misstatements: front-loaded awards on straight-line below the floor, repricing booked as new grants with the old cost reversed, extension of a vested option on termination ignored, and Type III awards expensed at the original grant-date value.
Questions auditors ask
Can the company switch from graded to straight-line?
Not freely. The policy is applied consistently to awards with similar features, so a switch needs a documented basis and a conclusion on which awards it covers.
Is a repricing ever free of cost?
It is when the fair value of the modified award is not higher than the original immediately before the change. The remaining original cost then continues over the remaining service period.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- KPMG, Share-based payment Handbook, June 2026 (graded vesting policy election, floor, protective acceleration features, modification types, exercise period extensions, calculated value): https://kpmg.com/kpmg-us/content/dam/kpmg/frv/pdf/2026/shared-based-payment.pdf
- PwC Viewpoint, Stock-based compensation guide, 2.8 Awards with graded vesting: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/stockbased_compensat/stockbased_compensat__3_US/chapter_2_measuremen_US/28_awards_with_grade_US.html
- PwC Viewpoint, Stock-based compensation guide, 4.3 Modifications of equity-classified awards: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/stockbased_compensat/stockbased_compensat__3_US/chapter_4_modificati_US/43_modifications_of__US.html
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