When a company pays people in equity instead of cash, the cost does not simply vanish. ASC 718 is the rule that puts it on the books.
Stock options, RSUs, restricted grants, all of it carries real value, and US accounting standards make you measure that value and record it as an expense. It is the FASB standard that tells you how. For any startup handing out shares to hire talent it cannot yet pay in salary, this is the standard that turns those grants into numbers on the books.
This guide covers what the standard is, the awards it touches, how the math and expensing work, and why it matters more than founders expect.
ASC 718 is the section of US GAAP that governs the accounting for share-based payments.
Set by the Financial Accounting Standards Board, its full name is FASB ASC Topic 718, "Compensation, Stock Compensation," and it lives inside the Accounting Standards Codification. The scope is broad. It covers equity awards a company grants to employees and, in most cases, to nonemployees in exchange for goods or services. If your business pays anyone with stock rather than cash, the guidance in ASC 718 applies, much like its revenue-recognition sibling ASC 606 governs how you book revenue.
The standard answers one question above all. What is this equity worth, and when does it hit the income statement.
The whole idea fits in one line. Measure the award at fair value on the grant date, then expense it over the period the employee earns it.
That grant-date fair value becomes the total compensation cost. You do not remeasure it every quarter for a standard equity award, which is what keeps the accounting workable. Instead, you spread that fixed cost across the service period, the stretch of time the employee has to keep working before the award is fully theirs. The principle here is simple to state and surprisingly fiddly to apply.
Fair value at grant, expense over service. Everything else is detail stacked on top.
Equity compensation comes in more flavors than most people realize.
Employee stock options give the holder a right to buy shares at a set price later. Restricted stock and restricted stock units hand over actual shares on a vesting schedule. Employee share purchase plans let workers buy stock at a discount, and profits interests show up in LLC structures. ASC 718 covers all of these share-based payment awards, along with stock appreciation rights and similar instruments. The label matters less than the substance: if the pay is tied to your shares, it likely falls in scope.
Different awards, one framework for measuring and recording them.
Not every award is treated the same way, and the split matters more than it looks.
Most stock options and RSUs are equity-classified, which means you measure them once at grant and leave that value alone. Some awards, usually those settled in cash or tied to a figure the company can change, are liability-classified, and those you remeasure at fair value every reporting period until they settle. Getting the classification right up front decides how much work the accounting takes for years. A cash-settled stock appreciation right behaves nothing like a plain equity grant.
Classify first, because the classification drives everything after it.
Full-value awards are easy to value. A stock option is where it gets interesting.
For full-value awards like RSUs, fair value is basically the share price on the grant date. An option is harder, because its worth depends on future share movement, so companies use an option-pricing model like Black-Scholes or a lattice model to estimate fair value. Those models pull in the stock price, the strike price, expected volatility, the option term, and the risk-free rate. Private companies also need a defensible fair market value for their shares, which usually means a 409A valuation handled with the same technical rigor as the rest of their books.
That number is the foundation. Get it wrong and every expense number built on it is wrong too.
This is where the expense actually lands on your financials.
Once you have the grant-date fair value, you recognize that cost over the vesting period as the employee earns the award. A four-year option that vests evenly means you book roughly a quarter of the cost each year. Awards that release in chunks, called graded vesting, can be expensed on a straight-line basis or by the accelerated FIN28 method (also written FIN 28), and the choice changes the timing. When an employee leaves early, you generally reverse the cost tied to the forfeited, unvested awards.
The expense follows the schedule. As people earn their equity, the cost shows up.
Real life changes the plan, and the standard has rules for that too.
If you modify an award, say you reprice underwater options to keep people motivated, modification accounting kicks in and you measure the extra value handed over. That incremental value becomes additional compensation expense on top of the original. Beyond the measurement work, the standard requires real disclosure: companies have to lay out their share-based payment arrangements, the assumptions used, and the amounts in the notes to the financial statements. Public companies carry the most detailed financial reporting here, though private companies disclose too.
The numbers are only half the job. The notes tell the story behind them.
For a venture-backed company, ASC 718 is not academic. It is a fundraising issue.
Equity is how startups compete for talent, so stock comp often runs through their financials in a big way. When investors dig into due diligence ahead of their funding rounds, they expect GAAP-compliant financials with the stock comp accounted for correctly. Messy stock-comp numbers slow a raise and dent credibility at the worst possible moment. This is the kind of technical accounting US CPA firms hand to us at Madras Accountancy. Our offshore team handles equity compensation accounting for startups and the audit-ready financial reporting that goes with it. If a client is wrestling with stock comp, reach out.
What is ASC 718? It is the US GAAP standard for the accounting of share-based payments. Formally Topic 718, it tells companies how to measure stock-based compensation at fair value and record it as an expense on their financials.
What does ASC 718 apply to? It applies to awards granted to employees and, in most cases, nonemployees for services: stock options, RSUs, share purchase plans, and profits interests. If pay is tied to company equity, the standard generally applies.
How is stock-based compensation measured? You measure most awards at their grant-date fair value, and that figure becomes the total expense. For a standard award you do not remeasure it later. You simply recognize the cost as the award is earned.
What is the difference between equity and liability awards? Equity-classified awards are measured once at grant and not remeasured. Liability-classified awards, often cash-settled, are remeasured at fair value every reporting period until they settle. The classification decides how much ongoing work the accounting requires.
How do you value a stock option? Because an option's value depends on future share movement, companies use an option-pricing model such as Black-Scholes. The model uses the stock price, strike price, expected volatility, option term, and risk-free rate. Private companies usually rely on a 409A valuation.
When is compensation cost recognized? As the employee earns the award, period by period. A four-year award split evenly spreads the expense across those years. If someone leaves before an award is earned, the cost on the unvested portion is generally reversed.
Does ASC 718 apply to private companies? Yes. Private companies follow the standard too, with some practical expedients available, such as simplified approaches to estimating expected term. They still measure fair value, recognize the cost, and provide the required notes.
What disclosures does ASC 718 require? Companies lay out their share-based payment arrangements, the method and assumptions, the awards granted and outstanding, and the cost recognized. These notes appear in the financials, with public companies providing the most detail.
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