ASC 718 in plain language: what stock comp really costs your P&L

Stock compensation feels free — no cash leaves the company. Accounting disagrees. Under FASB ASC Topic 718, equity awards to employees and directors are an expense, measured once and then spread over the time the recipient earns them. If you run a small public company, this number flows into every 10-Q and 10-K you file, and auditors read it closely because it is one of the few places where a spreadsheet error becomes a restatement.

The core rule: measure once, at grant

The foundation of Topic 718 is grant-date fair value. On the day an award is granted, you measure what it is worth, and that measurement is locked. The stock price can double or crash afterward; the expense you recognize does not change for a plain equity-classified award. What counts as the grant date matters: it requires a mutual understanding of the award's key terms and the necessary approvals — which is why the board approval date, not the offer-letter date, usually controls.

RSUs are easy, options need a model

For restricted stock and RSUs, fair value is essentially the stock price on the grant date. No model, no assumptions worth arguing about. For stock options, fair value comes from an option-pricing model — Black-Scholes-Merton is the common choice for plain awards — driven by the stock price, the exercise price, expected term, expected volatility, the risk-free rate, and expected dividends. For a small-cap with a short trading history, expected volatility and expected term are where the judgment lives, and where auditors will ask you to show your work.

Spreading the expense

The total fair value is recognized over the requisite service period — normally the vesting period. For a simple award vesting over four years, straight-line recognition over four years is the common approach. Awards with performance conditions are recognized when the performance condition is probable; awards with market conditions (a stock-price hurdle) bake the condition into the grant-date fair value itself and the expense is recognized even if the hurdle is never hit. The distinction between performance and market conditions is one of the most commonly botched areas in small-company financials.

Forfeitures: a real policy choice

When someone leaves before vesting, their unvested expense reverses. Companies choose, as an accounting policy, whether to estimate forfeitures upfront or account for them as they occur. For small companies with lumpy headcount, accounting for forfeitures as they occur is simpler and easier to defend — but it makes the expense line jumpier when people leave. Either way, the policy must be applied consistently and disclosed.

Why the tracker matters more than the model

Most ASC 718 errors we see are not valuation errors — they are data errors. A grant recorded with the wrong date, a vesting schedule entered off by a month, a cancelled award that kept amortizing. The fair-value model is run once per grant; the expense schedule runs every quarter until the award is done. A grant tracker whose dates tie to board approvals and whose schedules recompute from source data is what keeps the number defensible.

Sources. FASB Accounting Standards Codification Topic 718, Compensation — Stock Compensation (fasb.org). General information, not accounting advice — your auditors and the Codification text itself are authoritative for your facts.