Accounting for Stock Compensation Under FASB ASC Topic 718

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, Stock Compensation (formerly, FASB Statement 123R), requires generally that all equity awards granted to employees and nonemployees be accounted for at “fair value.” This fair value is measured at grant for stock-settled awards, and at subsequent exercise or settlement for cash-settled awards. Fair value is equal to the underlying value of the stock for “full-value” awards such as restricted stock and performance shares, and estimated using an option-pricing model with traditional inputs for “appreciation” awards such as stock options and stock appreciation rights. Compensation cost equal to these fair values is recognized net-of-tax over the vesting or performance period only for awards that vest, but there are important exceptions for awards with “stock price” or “intrinsic value” performance criteria. Subsequent modifications to outstanding awards result in incremental compensation cost if fair value is increased as a result of the modification. Thus, a value-for-value stock option repricing or exchange of awards in conjunction with an equity restructuring does not result in additional compensation cost. There are special provisions for nonpublic companies that are intended to ease compliance with accounting for stock compensation.