This chapter discusses the measurement and recognition of compensation cost for employee stock-based awards. Employee awards are measured at fair value on the grant date and the resulting compensation cost is recognized over the requisite service period. Awards typically include vesting conditions, which could impact the amount of compensation cost recognized or the timing of recognition.

This chapter generally addresses the accounting for equity-classified awards; however, many of the concepts discussed also apply to liability-classified awards (e.g., the impact of vesting conditions). Refer to SC 3 for further discussion of liability-classified awards.

In November 2021, the SEC staff released Staff Accounting Bulletin No. 120 (SAB 120) expressing their views on accounting for share-based awards under ASC 718 that are granted shortly before a release of material non-public information that is expected to result in a material increase in share price (described in SAB 120 as “spring-loaded” awards). In these situations, SAB 120 indicates that companies are expected to consider whether adjustments to the observable market price of the underlying share and estimates of expected volatility are necessary in order to determine the fair value of their share-based payment transactions. The guidance emphasizes the need for strong corporate governance and internal controls when granting equity awards, and details various disclosures that should be made when spring-loaded awards are granted. Staff accounting bulletins express the SEC staff's interpretation of existing GAAP and should therefore be considered in any unissued financial statements.