How to Report and Expense Stock Options?
This article is designed to break down the accounting procedures for reporting stock-based compensation and briefly describe stock options.
When it comes to the stock-based compensation received by an employee, the first thing that you will want to consider is how to handle the reporting and expenses for these options. The most popular methods for reporting the expenses for stock-based compensation include ASC 718 reporting. Stock options are a form of stock-based compensation and therefore fall under ASC 718 accounting rules. As such, stock options refer to the benefit given to an employee for the right to purchase common stock of a corporation at a set price (exercise price). That being said, it is essential to properly report the stock options expenses that you incur when it comes to stock-based compensation such as stock options. This article is designed to break down the accounting procedures for reporting stock-based compensation and briefly describe stock options.
Stock options expense and reporting
Stock options expense reporting is a way to account for the value of share options, the number of shares issued, the grant date, exercise price, and expiration date of share options. When recording stock options, the cost basis is established by taking into account the fair value at the time of grant. It is crucial to understand the stock options expense reporting in order to properly account for the annual expenses associated with stock-based compensation.
However, the stock options expenses are non-cash in nature due to the fact that equity is issued as compensation for services rendered. In addition, the stock options expenses are not triggered until the date of exercise or vesting of equity. Be sure that you input the entire data correctly to avoid any potential issues.
What is stock-based compensation?
Stock-based compensation is the currency of choice when it comes to compensating high-performing employees. Stock-based compensation can be used as a form of employee retention, along with providing long-term incentives for employees. As such, employees are provided with an opportunity to earn equity by providing the best possible service to their firm. Stock-based compensation is more effective than cash when it comes to increasing employee loyalty, engagement, and performance.
Some of the common forms of stock-based compensation include stock options, restricted stock, employee stock ownership plan (ESOP), and performance shares. The effects of stock-based compensation vary based on the type of equity being issued, the number of shares issued, and the valuation of stock-based compensation. As a result, it is vital to understand the different types of stock-based compensation in order to accurately account for them.
What is the stock option expense?
The stock option expense is an accounting method utilized to report the expense of the share options granted to employees of a corporation. Due to the fact that these share options are usually granted to employees for services rendered, there is no corresponding cash inflow. In order to calculate the stock option expense, a corporation will record the expense of issuing share options to an employee when it meets the necessary criteria.
How do stock options expensing work?
The stock options expense is an accounting method that is designed to record the expense incurred when it comes to issuing share options to employees of the company. As such, determining the value of the share options, the number of equity shares issued, the grant date, and the exercise price of the stock options is vital to accurately account for all stock options expenses. In this regard, ASC 718 reporting is a useful tool for accounting for stock-based compensation.
Pros and cons of expensing stock options
You will typically want to consider expensing stock options when it comes to reporting the stock options expenses granted to employees of a corporation. However, there are some pros and cons associated with expensing stock options which are as follows:
- The primary benefit of expensing stock options is the ability to provide employees with a level of clarity. In this regard, employees are provided with all necessary information on the company’s tax, accounting and financial reporting. As a result, employees are in a better position to determine their annual tax liability through the filing of their tax returns as well as other financial activities.
- The stock options expense reporting is an important component of the corporate governance framework that has been implemented by the federal government. Corporations are required to provide employees with a formal discussion of the compensation policies along with how they influence the decision-making process. Employees will also be aware of any adjustments made to their financial package when it comes to stock options and other forms of equity compensation.
- The biggest drawback of stock options expense reporting is the fact that it is a non-cash in nature expense. Essentially, this means that the amount of expense incurred by a corporation when it comes to issuing share options to its employees will not result in outflows or inflows of cash. As a result, it can be difficult to understand the total effect of the amount issued when it comes to determining the net income or loss of a corporation.
- It is important to note that the stock options expense reporting is generally not consistent when it comes to the timing of expense recognition. The timing of the expense recognition depends on the type and number of equity shares issued, grant date, and other factors. As a result, it can be difficult to provide accurate financial statements at all times. Well, how to expense your stock options?
How to expense stock options
The stock options expense reporting process is a financial report that must be properly accounted for by corporations. The process of expensing can be completed in different ways depending on the type and number of equity shares issued, the grant date, and other similar aspects. Following are steps you should follow properly when reporting stock options expenses:
- Stock option expensing methods – Choosing the best methods to value stock option expense is crucial for the accurate financial reporting of the expense. Citing the fact that the stock options expense reporting is subject to a fair amount of complexity, corporations may choose to apply different methods for expensing stock options. It is in your best interest to choose the most appropriate method for the specific situation.
- Fair value calculation – It is in a corporation’s best interest to review the value of share options if they want to accurately calculate the amount for expensing stock options. 409A valuation is such a useful tool for calculating the fair value of your common stock options. It is important to note that a fair value calculation is dependent on a number of factors, including the type and number of common stock shares issued.
- Intrinsic value calculation – This is a method that will reconsider the intrinsic value of your stock options if you want to account accurately for expensing stock options. Having said that, an intrinsic value calculation will take into account the grant date, exercise price, and the number of shares issued when it comes to financial reporting.
- Stock option expensing example – Stock options expense reporting is one of the most important components of business accounting. Therefore, it is essential to understand how it works in real-life situations. Hence, this section of the article aims to provide you with an example of how to properly expense stock options.
For instance, if you own a corporation that has decided to issue approximately 10,000 shares of its common stock to its employees, it is important to expense the associated cost for the same. Multiplying the number of shares issued by the fair market value of such common stock shares will result in the total expense incurred by the corporation. While this is considered a non-cash expense and will be included under the income statement.
How to report stock options expenses
The Financial Accounting Standards Board (FASB) has established ASC 718 to provide a framework that corporations can follow when reporting their stock options expenses. In other words, the ASC 718 expense reporting rules provide corporations with a mechanism for determining how to properly account for the expense when it comes to granting share options to their employees.
ASC 718 stock option expense reporting
Well, ASC 718 comprises a number of standards and regulations that define the actual process of accounting and reporting for stock options expense. Here are the steps that should be followed when expensing stock options under ASC 718:
- Collect required information and data – First, you must gather all the relevant information and data required for expensing stock options. This includes identifying the number of shares issued, grant date, and exercise price, along with determining the fair value of such shares at the time of grant.
- Do business valuation – Next, you will have to calculate the worth of the company by doing a business valuation. For this purpose, you will have to use the services of professionals such as business valuation consultants and accountants in order to obtain the required data and information.
- Collect and report all the company’s expenses – After collecting the required data, it is now time to calculate the total amount that has been expensed and report it accordingly. Due to the fact that this process involves a number of moving parts and financial reporting adjustments, it is highly recommended that you get the help of a specialist before attempting to do so.
- Have a disclosure – Finally, it is essential to have an accurate disclosure of the stock options expenses. This should be done in order to provide a fair value for all such expenses, which will be included in the financial statements. Hence, reviewing your financial statements quickly after completing the expense reporting process is important.
What does the ASC 718 stock option expense report include?
First and foremost, the ASC 718 stock option expense report is a document that must be completed and submitted in accordance with the requirements of FASB. As such, the ASC 718 expense report includes a number of essential details such as the stock option plan, number of shares issued, grant date, exercise price and the actual fair value of shares at the time of grant. Therefore, a company must carefully review the details of its stock option expense report to ensure that it is comprehensive and accurate.
How can Eqvista help with your ASC 718 stock option expense reporting?
Eqvista provides a platform that allows you to create, manage and complete your ASC 718 stock option expense report. With this in mind, our software will help you to quickly and easily generate all the documents that are required for completing a stock options expense reporting process.
Additionally, the team of experts from Eqvista will help you to select the most appropriate reporting method for the options that are being issued. Hence, our software and services will provide you with all the necessary tools and in-depth guidance for completing your stock options expense reporting process.
Get your ASC 718 stock options expense report today with Eqvista!
Stock options are a great tool for motivating your employees to increase their performance. However, given the perks of stock options, proper stock options expense reporting is vital in order to accurately account for them. As such, it is essential to know about the ASC 718 stock option expense reporting process and the specific components that must be included when reporting stock options expenses for such options. Eqvista will provide you with an easy and simple platform and the required guidance to help you complete your stock option expense reporting process. Get in touch with Eqvista now.