ASC 718 — Accounting for Stock-Based Compensation

ASC 718 defines how companies measure, recognize and disclose stock-based compensation (options, RSUs, performance awards, and similar instruments). This guide explains grant-date measurement, valuation techniques, journal entries, disclosures, common pitfalls, and practical controls so finance teams, audit committees and boards can be audit-ready.

Overview — What ASC 718 requires

ASC 718 (FASB Topic 718) requires companies to measure equity awards at grant-date fair value and recognize the related compensation expense over the requisite service period. Disclosure requirements include roll-forwards of awards, assumptions used in valuation models, and the effect on earnings.

Key takeaways:

  • Measure at grant date (fair value)
  • Recognize expense over the vesting/service period
  • Document assumptions, methods and disclosures for auditors

Types of awards covered

Stock options (non-qualified and incentive stock options)
Restricted Stock Awards (RSAs)
Restricted Stock Units (RSUs)
Performance stock units (PSUs) and market-condition awards
Other equity-settled awards and hybrid instruments

Each award type can require different valuation approaches and recognition patterns depending on vesting, performance and market conditions.

Core concepts explained

Grant-date fair value

Fair value at the grant date is the anchor for ASC 718 accounting. That value is the basis for all subsequent recognition.

Requisite service period & recognition

Expense recognition generally follows the vesting schedule. For graded vesting, use the appropriate attribution method (straight-line or graded attribution). For performance awards, recognition depends on whether the performance condition is probable.

Forfeitures

Estimate forfeitures and recognize expense net of expected forfeiture rates — update estimates as real forfeitures occur.

Modifications & cancellations

Modifications may create incremental expense. Cancellations and accelerations have specific recognition rules and often accelerate unrecognized compensation.

Valuation techniques

Black-Scholes / OPM

Common for simple options. Requires inputs: underlying price, strike price, expected volatility, expected term, risk-free rate, dividend yield.

Lattice / Binomial models

Useful for early exercise patterns and path-dependent features.

Monte-Carlo simulation

Appropriate for market-condition awards or complex payoff structures (e.g., TSR, multi-metric market awards).

Hybrid approaches

Combining methods can be effective for private companies where some inputs are estimated and market data is limited.

Inputs & assumptions — best practice

Volatility: use market proxies from comparable public companies or QuantTerminal™ peer data
Expected term: consider exercise behavior for private-company options
Risk-free rate: matching option term to Treasury yields
Dividend yield: company policy or market proxy
Forfeiture rate: historical experience or peer benchmarks

Document and justify all assumptions; maintain source links and calculation steps.

Journal entries (illustrative)

During service period (expense recognition)

Dr Compensation Expense

Cr Additional Paid-in Capital — Stock Compensation

On exercise

Dr Cash (exercise price)

Dr APIC — Stock Compensation (cumulated recognized)

Cr Common Stock (par)

Cr APIC (excess)

Adjust for forfeitures, modifications, and tax withholdings per policy.

Required disclosures (what auditors expect)

Total compensation cost recognized (current & future periods)
Weighted average assumptions (volatility, expected term, risk-free rate)
Roll-forward table: awards outstanding, granted, forfeited, exercised, and expired
Nature and terms of significant awards (market/ performance conditions)
Impact on earnings per share (if applicable)

Include supporting schedules and model backups in the audit binder.

Common pitfalls & how to avoid them

Stale or unsupported assumptions

Use up-to-date market proxies and document sources

Incomplete documentation

Always attach grant approvals, board minutes, and agreements

Ignoring modification accounting

Revalue and record incremental cost

Weak audit trail

Retain versioned models and provenance for every input

Mitigation: centralize grants, standardize templates, and keep a signed grant file.

Practical workflow checklist

Policy & templates: formalize grant approval, accounting policy, and granting authority
Intake: collect cap table, grant agreements and financials
Grant-date valuation: run fair-value model and store model file
Recognition schedule: auto-generate amortization and journal entries
Monitor & update: adjust forfeiture estimates and capture modifications
Audit pack: compile roll-forward, assumptions, approvals, and model backup

Integrations and tooling

Cap table & grant management: sync grant activity to avoid manual errors
ERP & payroll: ensure tax and withholding are aligned with recognized expense
Valuation engine: use Black-Scholes, lattice or Monte-Carlo models with full audit trails
Data feeds: market volatility proxies and peer comparables (QuantTerminal™) improve defensibility

How QuantPillar helps

QuantCore™

Centralizes grants, approvals and recognition schedules; produces audit-ready journal entries and disclosure packs.

QuantVal™

Produces grant-date fair value models (Black-Scholes/Monte-Carlo) with reproducible files and assumption documentation.

QuantTerminal™

Supplies volatility proxies, peer option life and comparables to support inputs.

Expert Review

Valuation expert sign-off for complex or auditor-sensitive awards.

Sample deliverables

Grant-date Fair Value memorandum (signed)
Reproducible valuation model (Excel/Sheets) with scenario tabs
Amortization schedule & journal entry workbook
Disclosure pack: roll-forward, assumptions, and sample journal entries
Audit binder with provenance and approvals

Practical examples (short)

Simple option (startup)

Black-Scholes with volatility proxy from public peers and expected term estimate; expense amortized over vesting.

Market-condition award (TSR)

Monte-Carlo simulation at grant date; measured differently for recognition and settlement triggers.

Modification (repricing)

Incremental fair value measured and recognized as additional expense.

Frequently Asked Questions

Make ASC 718 audit-ready and automatic

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