Accounting
ASC 718 (Stock Compensation)
The accounting standard for recording expense from stock options, RSUs, ESPPs, and other equity-based compensation.
ASC 718 requires businesses that grant equity comp to recognize an expense over the vesting period, even though no cash leaves the business. Expense is based on the grant-date fair value (typically a Black-Scholes model for options, intrinsic value for RSUs).
Most relevant to SMBs that have introduced phantom equity, profits interests, or partner-buyout grants. Family businesses doing equity transitions to next-generation owners often need ASC 718 treatment to satisfy lenders or buyers.
Pure 100%-owner businesses with no employee equity can ignore ASC 718.
Common pitfalls
- Treating equity grants as a balance-sheet entry only — the income statement expense is real and required
- Forgetting to remeasure liability-classified awards each period
- Not coordinating ASC 718 expense with the entity's tax deduction timing — the two follow different rules
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