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When describing stock-based compensation, ASC 718 uses the term "compensation cost" rather than "compensation expense" to emphasize that stock-based compensation may be capitalized similar to the treatment of cash compensation or other employee benefit costs. When it is appropriate for an entity to capitalize the cost of employee benefits paid in cash, stock-based compensation paid to those employees should generally be treated in a similar manner. For example, employee costs may require capitalization as part of the cost of:
  • Inventory
  • Deferred loan origination costs
  • Costs to fulfil a contract
  • Self-constructed fixed assets
  • Capitalized internal-use software
  • Capitalized software costs
Once capitalized, compensation cost becomes part of the cost of the respective asset and subject to the requirements of the applicable GAAP that required its capitalization. When determining the amount of compensation cost to capitalize, companies should consider the effects of pre-vesting forfeitures and the potential reversal of capitalized compensation cost if the pre-vesting forfeiture rate assumption is trued-up (or upon actual forfeitures for those that elect to account for forfeitures when they occur).
ASC 718 does not provide specific guidance regarding compensation cost that qualifies for capitalization under other GAAP. SAB Topic 14 includes an interpretation on the capitalization of compensation cost as part of inventory. The SEC staff believes that a company may record a period-end adjustment to reflect the changes for capitalized compensation cost instead of recording the changes through the inventory-costing system. A company would need to establish appropriate controls surrounding the calculation and recording of this period-end adjustment, similar to any other period-end adjustment.
ASC 718 provides limited guidance on the income tax effects related to capitalized compensation cost. See TX 17.15 for more guidance on the income tax effects of capitalized compensation cost.
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