Stock Option Expensing Under ASC Topic 718 – Explained.

Stock Options

As companies scramble to pull together their year-end financial statements, emerging-growth companies often leave equity compensation reporting to the very last minute. But to report their numbers to investors and auditors, any company that has an employee stock option plan and reports in accordance with GAAP needs to determine how much compensation is related to options granted to employees in the current year and how much to amortize for previous grants.

CFOs and Controllers working on their compensation expense numbers have either already implemented a system for stock plan administration and reporting – or they’re still using old-fashioned spreadsheets. In either case, at this time of year, our support team at Corporate Focus gets a barrage of questions about certain common areas of stock option expensing under ASC Topic 718 (previously FAS 123R). Our customers – and those not yet using a system – are trying to figure out the variables that go into the Black-Scholes valuation equation and how to properly amortize equity compensation expense over the service or vesting period.

While a system or spreadsheets may be able to handle the heavy lifting, anyone doing stock option expensing needs to have some understanding of what they’re doing (even if it may be a lower priority than cash related items for fast growing, venture-backed companies). If that’s you, you’re in luck. When our customers and friends need a quick primer on stock option expensing, we refer them to a three-part series from our blog that explains the task in clear, concise steps. If you’re looking to get a better handle on this tricky topic, check out these posts:

Part 1: Valuation and Black-Scholes Variables. Explained.

The first part explains the six variables used by the Black-Scholes formula to determine the grant-date fair value for a stock option award.

Part 2: Expensing Stock Options. Demystified.

The second part explains the eight terms you need to know in order to properly amortize the fair market value over the service period, including the true-up related to option vesting and forfeitures.

Part 3: FAS 123R Reporting Disclosures. Clarified.

The third part explains the two disclosures related to the valuation summary and the nine disclosures related to option activity during the period, as required by ASC Topic 718-10-50 (previously para. A240 under FAS 123R).

Spend a few minutes reading each of these blog articles, and you’ll come away with a solid understanding of the basics of stock option expensing, including how the option value is determined, how it’s amortized each year, and the requisite disclosures. It will be a great investment of your time prior to moving ahead with your equity reporting.

Stock option expensing is highly complex and requires adjustments every reporting period. So if you don’t know it yet, it’s worth taking the time to learn. At a minimum, these articles will give you enough information to ask the right questions of your accountant or auditor. And you just may finally understand what’s going on in your stock plan administration and reporting system (or spreadsheet).

If you can recommend a great resource for stock option expensing that applies to privately-held companies, let us know and we’ll be happy to share it with others.

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