What is ASC 718?
In 2009, the Financial Accounting Standard Board (FASB) created a codified numbering system for accounting literature known today as the Accounting Standards Codification (ASC). Under this system, they created Topic 718 (formerly FAS123r) which provides general guidance regarding expensing for stock-based compensation issued to employees. In July of 2018, FASB released an update which expands the scope of ASC Topic 718 to include not only share based compensation (SBC) issued to employees, but also to non-employees.
Under ASC 718 all equity awards granted in connection with compensation must be accounted and expensed for using a valuation model to determine the fair value, calculated value, or intrinsic value of the award on its issuance date as a measure of the share based compensation cost to the issuing entity. The guidance further states that this cost of the award should be allocated over the award’s requisite service period. Acceptable valuations methods used to determine the award’s value or cost include the Black-Scholes Option Pricing Model, the Lattice Model, and the Monte Carlo Model. Under some situations, an entity may be allowed to use an Intrinsic Valuation Model to estimate the award’s value. The cost or value is then expensed using an acceptable amortization method, such as straight-line, FIN28 (also known as the accelerated method), or the Ratable method. An expense is then booked periodically as an entry on the general ledger.
Carta helps streamline the process, saving our clients countless hours of their time, by leveraging the data that is saved on the Carta platform. The SBC expensing tool uses information such as vesting schedule, exercise price, 409A Fair Market Value prices, issuance date, and expiration date in order to complete the valuation and allocation of the expense. Additionally, the tool pulls in information such as daily US Treasury yields and the public peer company's daily trading data. By design, our software then calculates the assumptions that will be used in the Black-Scholes Option Pricing Model or Intrinsic Valuation Model and allocate the expense accordingly. Since the underlying company data has already been loaded into the Carta platform, the input requirements needed to generate a report are generally limited to public peer company tickers, forfeiture rate, and reporting period. All other inputs should already be recorded in Carta through the normal cap table management process.