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15.4 Stock-based compensation—disclosure
Publication date: 31 Mar 2024
us Financial statement presentation guide
ASC 718-10-50-1 establishes four disclosure objectives for stock-based compensation. A reporting entity that has granted stock-based compensation awards to its employees should provide information that enables users of the financial statements to understand the following:
• The nature and general terms of stock-based compensation arrangements outstanding during the period
• The income statement effects of stock-based compensation
• The method of estimating the fair value of stock-based compensation awards
• The cash flow effects of stock-based compensation
ASC 718-10-50-2 specifies the minimum information that a reporting entity should provide in its annual financial statements in order to achieve these objectives. The specific requirements are discussed in the subsections below. In addition, ASC 718-10-55-134 through ASC 718-10-55-137 includes an illustrative example of the disclosure requirements.
Question FSP 15-1 addresses required share-based compensation disclosures for interim financial statements.
Question FSP 15-1
Is a reporting entity required to provide the disclosures outlined in ASC 718 in its interim financial statements?
Is a reporting entity required to provide the disclosures outlined in ASC 718 in its interim financial statements?
PwC response
No. The disclosure requirements outlined in ASC 718 are only required in a reporting entity’s annual financial statements. However, reporting entities should consider the guidance in ASC 270, Interim Reporting, which requires disclosure of significant changes since the last reporting period in interim financial statements (see FSP 29). Many reporting entities provide disclosures about stock-based compensation on an interim basis to provide transparency into the activity occurring during the interim period.
15.4.1 Description of awards and methods
A reporting entity should include a description of its stock-based compensation arrangements, including the general terms of the awards, as well as any accounting policy elections. Such disclosure should include the following:
• The requisite service periods and any other substantial conditions, such as vesting conditions
• The maximum contractual term
• The number of shares authorized for awards of options or other equity instruments
• The method (for example, fair value, calculated value, or intrinsic value) used to measure compensation cost
• The policy for estimating expected forfeitures or recognizing forfeitures as they occur, if not separately disclosed elsewhere.
We believe reporting entities should also disclose its policy election for the attribution of awards with a graded vesting schedule and only service conditions.
15.4.2 Option and similar awards
A reporting entity that awards stock options or similar awards (such as stock appreciation rights) to its employees should provide a rollforward of activity for the most recent year an income statement is presented. As discussed in ASC 718-10-50-2(c)(1), the rollforward should include the number and weighted-average exercise price (or conversion ratios) of the following groups of awards:
• Outstanding at the beginning of the year
• Granted during the year
• Exercised or converted during the year
• Forfeited during the year
• Expired during the year
• Outstanding at the end of the year
• Exercisable or convertible at the end of the year
For fully vested awards and awards expected to vest, ASC 718-10-50-2(e) requires separate disclosure of the following for awards outstanding and awards currently exercisable (or convertible), at the date of the latest balance sheet:
• The number
• The weighted-average exercise price (or conversion ratio)
• Aggregate intrinsic value
• Weighted-average remaining contractual term
If a reporting entity elects to account for forfeitures when they occur in accordance with ASC 718-10-35-3, these disclosures also apply to unvested shares for which the requisite service period has not been rendered but for which the vesting is expected based on achievement of a performance condition.
A reporting entity should provide a description of its policy, if any, for issuing shares upon award exercise (or stock unit conversion), including the source of those shares (that is, new shares or treasury stock). If a reporting entity expects to repurchase shares in the following annual period, the reporting entity should disclose an estimate of the number (or range) of shares it will repurchase during that period.
Question FSP 15-2 addresses the issue of whether disclosure is required for awards when no compensation cost was recognized in the period.
Question FSP 15-2
Is a reporting entity required to include awards that are granted for which no compensation expense has been recognized (e.g., because the awards vest upon a performance condition that is not currently probable of occurring) in the rollforward?
Is a reporting entity required to include awards that are granted for which no compensation expense has been recognized (e.g., because the awards vest upon a performance condition that is not currently probable of occurring) in the rollforward?
PwC response
Yes. ASC 718 requires disclosure of awards granted during the year regardless of whether compensation expense has been recognized. However, if the grant date criteria in ASC 718 was not met (e.g., the key terms and conditions have not been communicated), then those awards should not be included as granted in the rollforward. This guidance is also applicable for other types of awards. See FSP 15.4.3.
15.4.3 Other awards
As discussed in ASC 718-10-50-2(c)(2), a reporting entity that grants its employees awards other than options (e.g., restricted stock) should provide a rollforward of activity for the most recent year an income statement is presented. The rollforward should include the number and weighted-average grant-date fair value (or calculated value or intrinsic value, if used) for the following groups of awards:
- Nonvested at the beginning of the year
- Granted during the year
- Vested during the year
- Forfeited during the year
- Nonvested at the end of the year
15.4.4 Fair value disclosure
As discussed in ASC 718-10-50-2(d), for each year an income statement is presented, a reporting entity should disclose:
• The weighted-average grant-date fair value (or calculated value or intrinsic value, if used) of equity awards granted during the year
• The total intrinsic value of options exercised (or stock units converted), stock-based liabilities paid, and the total fair value of shares vested during the year
For each year an income statement is presented, ASC 718-10-50-2(f) requires a reporting entity to provide a description of the method and significant assumptions used during the year to estimate the fair value (or calculated value, if used) of stock-based compensation awards, including (if applicable):
• Expected term
• Expected volatility
• Expected dividend rate
• Risk-free rate
• Discount for post-vesting restrictions and the method used to estimate it
A reporting entity that uses a valuation method that employs a range of assumptions over the contractual term of an award (e.g., a lattice model) should disclose the range of expected volatilities, dividend rates, and risk-free rates used, and the weighted-average expected volatility and dividend rate.
The guidance does not specify how to disclose the significant assumptions used when a reporting entity grants similar awards at different times throughout the year. Some reporting entities disclose a range of the significant assumptions used, while others disclose a weighted-average amount for each significant assumption.
15.4.4.1 Expected term assumption
As discussed in ASC 718-10-50-2(f)(2)(i), a reporting entity’s disclosure of expected term should include a discussion of the method used to incorporate the contractual term of the awards and employees’ expected exercise and expected post-vesting termination behavior.
A reporting entity that elects to use the simplified method discussed in SAB Topic 14 (Section D.2, question 6) to estimate expected term for its “plain-vanilla” options should disclose its use of the method and why it was selected. Disclosure should also be made of which options were valued using this method if not all options were valued using the same methodology, and the periods in which it was used.
For more discussion of the simplified method, see SC 9.3.
15.4.4.2 Expected volatility assumption
As discussed in ASC 718-10-50-2(f)(2)(ii), a reporting entity should disclose how it determined the expected volatility assumption. This could include whether the reporting entity used only implied volatility, historical volatility, or a combination of both, for which time periods, and the respective weighting.
As discussed in SC 6.2.1.1, a private company may use the calculated-value method to estimate fair value when sufficient information is not available to estimate expected volatility. This would entail substituting expected volatility with an industry sector index. In this case, a reporting entity should disclose the following:
• The reasons why it is not practicable to estimate expected volatility
• The industry sector index selected and the reasons for selecting it
• How it calculated historical volatility using that index
15.4.4.3 Change in valuation technique
A reporting entity may decide to change option-pricing models (for example, from Black-Scholes to a lattice model). A change in option-pricing model is not a change in accounting principle and therefore does not require preferability. However, a reporting entity should disclose any changes to the option-pricing model used and the reasons for the change.
15.4.5 Multiple awards
A reporting entity that grants awards under multiple employee stock-based compensation arrangements should provide separate disclosures for different types of awards to the extent they have different characteristics. For example, it may be important for a reporting entity to:
• Provide separate disclosure of weighted-average exercise prices (or conversion ratios) at the end of the year for stock options (or stock units) with a fixed exercise price (or conversion ratio) and those with an indexed exercise price (or conversion ratio)
• Segregate the number of stock options (or stock units) not yet exercisable into those that will become exercisable (or convertible) based either (a) solely on fulfilling a service condition, or (b) fulfilling a performance condition
• Provide separate disclosures for awards that are classified as equity and those classified as liabilities
15.4.6 Impact on financial statements
A reporting entity should disclose the impact of stock-based compensation on the financial statements. The disclosures should be made for each year an income statement is presented and should include:
• Total compensation cost for stock-based compensation awards recognized in income, as well as the total related income tax benefit
• Total compensation cost capitalized as part of the cost of an asset
• A description of significant modifications (including those that do not require modification accounting), including the terms, the number of employees affected, and the total (or lack of) incremental compensation cost resulting from the modifications. As of the latest balance sheet date presented, the reporting entity should also disclose the total compensation cost related to nonvested awards not yet recognized, and the weighted-average period over which it is expected to be recognized.
If not separately disclosed elsewhere (e.g., in the statement of cash flows), the reporting entity should also disclose the following for the most recent income statement year presented:
• Cash received from the exercise of stock options and similar awards
• All tax benefits from exercised stock options and similar awards.
• Cash used to settle equity instruments granted under stock-based compensation awards
Question FSP 15-3 discusses if expected forfeitures should be included in the disclosure of total compensation cost for nonvested awards.
Question FSP 15-3
Should a reporting entity reflect expected forfeitures in the disclosure of the total compensation cost related to nonvested awards not yet recognized?
Should a reporting entity reflect expected forfeitures in the disclosure of the total compensation cost related to nonvested awards not yet recognized?
PwC response
Yes, but expected forfeitures would only be included in this disclosure if the reporting entity’s policy is to estimate forfeitures.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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