Stock-Based Compensation (ASC 718)
ASC 718 requires companies to recognize compensation expense for employee stock options and other equity-based awards at fair value on the grant date, amortized over the vesting period.
Explanation
The fair value of stock options is typically measured using an option-pricing model (like Black-Scholes) at the grant date. This cost is recognized as compensation expense over the requisite service (vesting) period, with a corresponding credit to additional paid-in capital. Forfeitures can be estimated upfront or recognized as they occur.
Restricted stock awards and restricted stock units follow similar principles but are valued at the stock price on the grant date (no option-pricing model needed since there is no exercise price). Performance-based awards may require variable measurement if the vesting condition is a market condition versus a performance condition.
Key Points
- •Fair value measured at grant date using option-pricing model
- •Expense recognized over the vesting (service) period
- •Credit goes to additional paid-in capital (equity)
- •Forfeitures estimated or recognized as they occur
Exam Tip
Know that compensation expense is based on grant-date fair value and is not adjusted for subsequent changes in stock price. The key date is the grant date.
Frequently Asked Questions
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