ASC 718 Reporting: Best Practices for 2026

During the dot-com boom, the practice of issuing equity shares as a portion of employee compensation gained tremendous popularity. Unfortunately, accounting practices related to the expensing of equity-based compensation were not yet well standardized. Many emerging companies, in their eagerness to appear as profitable as possible, chose not to recognize such expenses at the time they were incurred. The result was significant inconsistencies in evaluating company performance, so regulators decided to standardize accounting related to employee equity and stock-based compensation.

What is ASC 718?

Standardization began in the mid-2000s with FAS 123(R), issued by FASB in December 2004 and effective for most public companies beginning January 2006. In 2009, FASB consolidated its accounting guidance into the Accounting Standards Codification, and FAS 123(R) was incorporated as ASC Topic 718 — the standard in effect today.

To summarize what ASC 718 does, it requires that companies:

• Measure the fair value of the equity awards at the grant date

• Recognize that value as compensation expense over the requisite vesting period

• Apply this to classic stock options, as well as restricted stock, RSUs, SARs, PIUs (see note below), awards to non-employees, and other share-based payment arrangements

• Disclose the nature, terms, assumptions, and impact of share-based payment arrangements in footnotes

Essentially, ASC 718 ensures that equity awards are treated as certifiable compensation costs that must be estimated, recognized, and disclosed (instead of simply being a footnote).

For a typical venture-backed startup, ASC 718 reporting serves as an important element of financial disclosure to investors. Many companies will begin incorporating ASC 718 reporting for the first time after a Series A or B round of funding. Thereafter, ASC 718 reporting becomes a standard part of the overall financial reporting package and serves as backup to subsequent financial audits.

For public companies: ASC 718 compliance is not optional and has no funding-stage threshold. Public companies are required to recognize and disclose stock-based compensation expense in every quarterly (10-Q) and annual (10-K) filing. The standard also intersects with SEC executive compensation disclosure rules, diluted EPS calculations under ASC 260, and proxy statement obligations — making accurate, automated ASC 718 reporting a continuous, high-stakes requirement.

Note on Profits Interest Units (PIUs): In March 2024, FASB issued ASU 2024-01 to clarify when PIUs and similar awards fall within ASC 718 (share-based compensation) versus ASC 710 (general compensation). The distinction has meaningful accounting implications: awards under ASC 718 follow a fair-value-based framework, while awards under ASC 710 are treated more like cash bonuses. ASU 2024-01 is now effective for public companies (fiscal years beginning after December 15, 2024) and for private companies (fiscal years beginning after December 15, 2025). If your company issues PIUs, confirm your classification is aligned with the updated guidance.

What Goes Into ASC 718 Reporting?

ASC 718 reporting can get complicated very quickly, so it helps to step back and take a high-level look at what goes into the process. The reporting exists to support the recognition of compensation expenses. That process consists of three basic steps:

1. Calculate the Fair Value of Stock Options

This can be difficult in the case of startups and private companies because shares are generally not liquid. In other words, there is no open market upon which the company’s stock is sold, so the determination of a fair value is often debatable. Thankfully, several different pricing models exist to determine the worth of such shares. ASC 718 guidelines do not dictate that you use one particular model, so you can choose whichever you prefer (provided that they remain consistent over time).

ASC 718 guidelines do not prescribe a specific valuation model. You may use whichever approach best reflects the terms of your awards, applied consistently to similar award types. That said, switching models requires justification. The new technique must be expected to produce a better estimate of fair value, so model changes should not be made lightly

Calculation of a fair value requires a number of inputs, typically including the option strike price, the fair market value, the expected dividend yield (usually zero for startup companies), the expected term of the grant, the volatility of the company’s stock, and the risk-free interest rate for the period in which the grant is in effect.

For public companies: Valuation inputs differ in important ways. Stock price is observable directly from market data rather than estimated through a 409A. Historical volatility can be calculated from your own trading history, though you must assess whether expected volatility may differ. Dividend yield should reflect your company's actual dividend policy and cannot be assumed to be zero. Public companies that issue options with long expected terms should also ensure their risk-free rate input corresponds to the expected term, using Treasury securities with matching maturities.

2. Allocate the Associated Expense Over the Useful Economic Life of the Associated Benefit

Just as you depreciate (or amortize) any tangible or intangible asset over its useful economic life, you handle the value associated with employee stock options similarly. Like depreciation, there are multiple ways in which you can make such an allocation. The simpler “straight-line” method allocates the value of a grant evenly over the service period to which the grant applies. If a grant is vested over three years, for example, then you would allocate one-third of the total cost in each year.

Another option is the graded vesting attribution method (sometimes still referenced in practice as the 'FIN28 method' after the superseded FASB Interpretation No. 28). This involves treating each vesting tranche as a separate award, resulting in accelerated front-loading of expense. To return to our previous example, if the first third of options vest in year one, then you would recognize the associated expenses in year one. If the second third vests in year two, then you would expense it in years one and two, and so on.

Important: For awards with performance or market conditions, the graded vesting attribution method is required under ASC 718 — not optional. The straight-line method is only available as a policy election for awards with service conditions only.

3. A Critical Policy Decision: How to Account for Forfeitures

Before vesting is complete, some employees will leave and forfeit their unvested awards. Under ASC 718, you must choose one of two accounting policies for handling these forfeitures and apply it consistently:

• Estimate forfeitures upfront: Develop a forfeiture rate assumption at grant date based on historical turnover data, and update it each reporting period as actual experience becomes known. This smooths expense recognition but requires ongoing estimation and true-up adjustments.

• Recognize forfeitures as they occur: Record expense as if all awards will vest, then reverse the expense for forfeited awards when terminations happen. This simplifies ongoing calculations but can create larger period-to-period expense swings.

Your chosen policy must be disclosed in your financial statement footnotes and applied consistently across similar award types. Changing the policy requires justification under ASC 250.

4. Recognize Those Expenses as Employee Compensation

Finally, you must record the expenses associated with the award of equity compensation as expenses in the general ledger and reflect them in the company’s income statement.

Why ASC 718 Reporting Gets Complicated Quickly

Although the last step is fairly straightforward, the first two can get complicated very quickly. Some of the reasons that ASC 718 reporting’s complexity can rapidly get out of hand include:

• Convoluted Inputs: There typically isn’t a liquid market for underlying shares of private companies, meaning that judgment, peer benchmarks, and external advisors are often required. This issue is exacerbated by award modifications, diverse award mixes, and classification challenges (whether an award is equity or liability). Public companies, see note below.

• Scale and Volume: As your company grows, the number of grants increases, new employees join and old ones leave, awards vest at different times, and more. However, disclosure demands also increase for external audits, making it more complicated to track and record everything properly.

• Integration and Data Flow: ASC 718 reporting relies on consolidating and coordinating award management, cap tables, valuation models, GL recognition, and disclosures. Any discrepancies between systems (e.g. HR and accounting) can lead to errors, which amplifies the risk when teams use traditional/static spreadsheets.

• Evolving Standards: ASC 718 continues to be updated as FASB responds to emerging practice questions. For example, ASU 2025-04 clarifies the accounting for share-based consideration payable to customers. Relevant for companies that issue equity awards as part of customer arrangements. It is effective for all entities for periods beginning after December 15, 2026, with early adoption permitted.

• Business Implications: Errors in ASC 718 reporting aren’t just small inconveniences that can be swept under the rug — they may lead to loss in investor confidence, delayed transactions, and increased scrutiny on their financials. Equity compensation can impact P&L, tax, compliance, and more.

Note for public companies: Inputs are observable from market data — but that doesn't eliminate complexity. Expected volatility must reflect forward-looking conditions, not just historical data. Expected term assumptions for executive options require careful judgment. And the SEC has been active in issuing comment letters challenging valuation assumptions that appear inconsistent with a company's market environment or that lack sufficient disclosure of how key inputs were determined.

ASC 718 Reporting Best Practices

If your organization is struggling with accounting for equity compensation, or if you’ll be needing to perform your first ASC 718 reporting at some point in the near future, here are some best practices to keep in mind as you get started.

1. Avoid Messy Manual Processes

Even if you choose to work with one of the simpler valuation models, ASC 718 calculations can get complicated very quickly. In small startups that are long on innovation and short on formal processes, you may be tempted to embark on the process of equity compensation reporting using Excel spreadsheets, hand-keyed data, and complex inline formulas.

As the number of employees in your organization grows, as members of your workforce come and go, and as the inputs to stock valuation fluctuate, the challenges of managing your ASC 718 reporting can quickly overwhelm you. This can often result in poorly managed data, spreadsheet formula errors, and inaccurate financial statements. Instead, you should invest in a tool to automate tedious activities and organize data in an easily accessible hub that minimizes time spent looking for documents or pulling information. Certent Equity Management does all of this and more, streamlining your equity administration via a modern and advanced system.

2. Plan for Scale Ahead of Time

The problem of manual processes becomes far more significant as the organization grows, the number of employees increases, and the frequency and value of equity grants rise. At this point, the stakes are growing ever higher, while you stretch the availability of skilled resources in-house thinner and thinner. You can’t simply hand off ASC 718 reporting to a poorly prepared financial analyst. It requires substantial ramp-up time, and it demands a highly trusted person that you can rely on to work with confidential information about employee compensation.

For companies planning to scale up quickly (e.g. most startup companies), we recommend planning well in advance for this rapid growth phase. That means having effective, reliable systems in place that can prevent bottlenecks from happening in the first place. As your company grows, the compliance requirements grow more complex, and so does the cost of getting it wrong.

3. Get Professional Advice

Ultimately, ASC 718 reporting is one of those specialty functions that outside professionals with deep expertise in the subject may handle best. For some, that might mean seeking advice and training from an external consulting organization. For others, it might mean a complete turnkey service that offloads record-keeping, administration, and reporting. For companies that view ASC 718 reporting as an unwelcome distraction, calling in professional help is often the most direct path to getting the job done accurately and on time.

4. Continuously Review and Adapt

Heading into 2026 (and beyond), it’s critical that you don’t treat ASC 718 as “set it and forget it.” As these standards evolve (e.g. new SEC guidance, updates to ASC 718, etc.), your business needs to keep its processes and systems flexible. We recommend revisiting key assumptions annually (or more frequently if business models or markets change), so they stay audit-defensible. It can also be valuable to perform stress tests and scenario analysis, such as for a potential situation where a large number of grants vest early. Another benefit of continuously reviewing and adapting your processes is that it keeps everything aligned with your business strategy and goals and prevents ASC 718 reporting and equity administration from diverging over time.

5. Understand Your Disclosure and Filing Obligations by Audience

For public companies, ASC 718 compliance doesn't end with expense recognition. Public companies face a layered disclosure framework that includes:

• Quarterly reporting (10-Q): Stock-based compensation expense must be disclosed and broken out by functional line item (e.g., R&D, SG&A, cost of revenue) in every 10-Q filing.

• Annual reporting (10-K): Comprehensive footnote disclosures are required, including the valuation method and key assumptions used, a rollforward of award activity, weighted-average grant date fair values, and unrecognized compensation cost with expected recognition periods.

• Proxy statement (DEF 14A): Stock-based awards granted to named executive officers must be disclosed in the Summary Compensation Table, Grants of Plan-Based Awards table, and Outstanding Equity Awards table, using SEC-prescribed methodologies that may differ from your ASC 718 grant-date fair value.

• Diluted EPS (ASC 260): Outstanding stock options and unvested awards must be included in diluted earnings per share calculations using the treasury stock method, adding another layer of coordination between equity administration and financial reporting.

• iXBRL tagging: Stock-based compensation disclosures in annual filings must be tagged in Inline XBRL per SEC requirements.

For private companies, the disclosure requirements are less prescriptive than for public companies. However, investor-grade ASC 718 disclosures — including your valuation methodology, forfeiture policy, and unrecognized expense — will be expected in any audit and increasingly scrutinized during due diligence for follow-on fundraising or an IPO.

Choose Certent Equity Management to Streamline Your ASC 718 and Stock Compensation Reporting

As more and more companies prepare for increased scrutiny, deeper investor expectations, and more complex equity-award landscapes, having a scalable and integrated equity management platform is mission-critical. Not only does your reporting pipeline need to be audit-ready, but it should provide a competitive advantage instead of holding you back.

If your organization is grappling with the challenges of ASC 718 reporting, insightsoftware can help. Our Certent Equity Management platform, administration services, and equity compensation services for public and private companies streamline your reporting processes and bring them up to speed with the rest of your industry. Certent EM centralizes and standardizes award data (e.g. grant date terms, vesting schedules, participant details, modifications, and more) and automates calculation of fair-value, forfeitures, and trace expenses to the general ledger. It also provides dashboards and reporting to easily monitor unrecognized costs, expenses by year, dilution, vesting tranches, and more. Even better, Certent integrates with your HR, payroll, cap table, and ERP/GL systems so you have a single source of truth that eliminates inconsistencies.

For public companies, Certent also supports SEC form preparation and disclosure, diluted EPS modeling, and the comprehensive footnote disclosures required in 10-K and 10-Q filings. Our platform generates audit-ready reports that map directly to your reporting obligations — so your equity team and your auditors are working from the same data.

Contact us today to request a demo of Certent Equity Management and speak with one of our equity administration experts.