Definition
Under ASC 718, equity-classified awards such as options and restricted stock are measured at grant-date fair value and recognized over the requisite service period, usually the vesting period. Service and performance conditions affect whether and when awards vest, and the expense is adjusted for forfeitures (estimated or recognized as they occur, by policy election). Market conditions are built into fair value and expense is not reversed if they are not met. Liability-classified awards are remeasured each period. Nonpublic entities have practical expedients, including for expected term.
Why it matters in an audit or review
Auditors test option pricing inputs, the underlying share value (often a 409A-type valuation), vesting terms, modifications, and completeness of grants against the board minutes and cap table.
Example
(Illustrative) 1,000 options are granted with a fair value of $4 each, vesting evenly over four years. Annual expense is $1,000.
Dr Stock compensation expense 1,000 Cr Additional paid-in capital 1,000
Common mistakes
- Using stale common stock valuations.
- Missing grants approved by the board but not recorded.
Sources
- FASB ASC 718-10-30 (measurement) and 718-10-35 (recognition)
- FASB ASC 718-10-25 (classification as equity or liability) and 718-10-30 (including practical expedients for nonpublic entities)
- FASB ASU 2016-09 (forfeiture policy election)
- AICPA, AU-C Section 540, Auditing Accounting Estimates and Related Disclosures
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error