What is stock expensing and how is it done? – ASC 718 (123R)
The options you are offering the employees in your company are a form of compensation.
In simple words, the options you are offering the employees in your company are a form of compensation. So, just like you expense the salary of an employee, you need to expense any options issued to them as well. The main assumption of stock options is to recognize the FMV of the employee stock-based compensation awards as compensation cost in the financial statements, beginning on the grant date. In short, you need to come to an FMV for the option. That is when you can then expense the grant over the useful life, which is normally the vesting schedule. It is, in fact, the same as how your depreciate plant, property, and equipment over their useful lives. However, more factors need to be considered.
ASC 718 and ASC 505-50
ASC 718 and ASC 505 are two GAAP “commandments” that direct the rules for expensing stock-based compensation awards. ASC 718 holds the rules for expensing stock awards to employees, and ASC 505 subsection 50 (or ASC 505-50) does the same for non-employees. Occasionally, you will also hear the “123R” being thrown around with “ASC 718.” Here, 23R is technically defunct, and was added to the ASC 718. Just to be clear, when people bring up 123R, they are basically just referring to ASC 718 under an old name. The process of expensing a stock option is done in two steps:
- Calculating the Fair Value of the option
- Allocating the expense over the option’s useful economic life
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