This article was originally published on October 30, 2022, and has been updated.
Our guide on Accounting for stock compensation assists companies in understanding and analyzing the accounting for share-based payments with employees and nonemployees under FASB Accounting Standards Codification (ASC) 718, Compensation—Stock Compensation. ASC 718 addresses the accounting for various types of equity-based awards issued as compensation for goods or services, and includes stock options, restricted stock, restricted stock units, stock appreciation rights, phantom stock, and profits interest, as well as any other awards based at least in part on the value of an entity’s equity.
Our comprehensive guide includes in-depth discussion and examples on:
- The scope of ASC 718
- The measurement of awards – including the measurement basis, grant date determination and effect of market, performance and service conditions on measurement of compensation cost
- Various aspects of the recognition of compensation cost – including the requisite service period and nonemployee vesting period, service and performance conditions that affect vesting, service inception date determination, accounting for forfeitures, graded vesting employee awards, early exercise of stock options, dividends on share-based payments, capitalization of compensation costs and clawback features
- The classification and accounting for liability awards – including when awards require liability classification, and the measurement objective and measurement date for liability-classified awards
- The estimation of fair value for stock compensation awards – including fair value at grant date, as well as describing valuation techniques
- Accounting for modifications – including modifications that change an award’s classification, inducements, equity restructurings, repurchases or cancellations of equity awards, cancellation and replacement of awards of equity instruments and modifications of an award when the holder is no longer providing service
The guide does not address the income tax and earnings per share effect of share-based payments, nor does it address the accounting for employee stock ownership plans or employee share purchase plans.
The June 2024 edition of our guide has been updated to incorporate guidance from the following Accounting Standards Updates (ASUs) issued by the FASB:
- ASU No. 2024-01, Compensation – Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards (see Sections 1.1, 1.3.1 and 4.3 of the guide)
- ASU No. 2023-05, Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement (see Section 1.3.3 of the guide)
This edition has also been updated to add (i) Appendix C, which summarizes the complete list of changes to the guide since the last edition, (ii) reference to the SEC’s final rule requiring the disclosure of clawback policies, (iii) an example of how expense should be recognized when an award is granted to a nonemployee in exchange for consulting services, and (iv) guidance on the accounting for a modification that changes the classification of an award from liability to equity and results in a decrease in the fair value of the award.
