Asc 718

Definition

ASC 718 refers to the Accounting Standards Codification Topic 718, which governs the accounting for share-based payments. This standard outlines how entities should recognize, measure, and disclose share-based payment transactions, including both equity-settled and cash-settled arrangements, ensuring transparency in financial reporting related to employee compensation.

5 Must Know Facts For Your Next Test

1. ASC 718 requires companies to measure the cost of share-based payments based on the fair value of the equity instruments granted at the grant date.
2. Entities must recognize compensation expense over the vesting period of the awards, reflecting the service period required before employees earn their stock options or other equity instruments.
3. The standard distinguishes between equity-settled transactions, which involve stock options or shares, and cash-settled transactions, which are settled in cash based on the value of the underlying equity instruments.
4. Public companies must include specific disclosures in their financial statements regarding share-based payment arrangements, including information about the nature and terms of these awards.
5. ASC 718 also provides guidance on modifications of share-based payment arrangements and how they should be accounted for in terms of additional expense recognition.

Review Questions

• How does ASC 718 impact the way companies account for share-based payments over time?
  • ASC 718 impacts the accounting for share-based payments by requiring companies to recognize compensation expense throughout the vesting period of the awards. This means that as employees provide services over time, a portion of the total fair value of the equity instruments granted is expensed in each reporting period. This approach aligns expense recognition with the timing of when employees earn their awards and provides a more accurate representation of compensation costs in financial statements.
• What are the key differences between equity-settled and cash-settled transactions as defined by ASC 718?
  • The key difference between equity-settled and cash-settled transactions under ASC 718 lies in how the awards are settled. Equity-settled transactions involve granting shares or stock options to employees, where compensation is based on the company's stock value. In contrast, cash-settled transactions require a cash payment to employees based on the fair value of the underlying stock at settlement. This distinction affects how each type is measured and recognized in financial statements.
• Evaluate how ASC 718's disclosure requirements enhance transparency for investors regarding share-based payments.
  • ASC 718's disclosure requirements enhance transparency for investors by mandating that companies provide detailed information about their share-based payment arrangements. This includes descriptions of the nature and terms of awards, valuation methods used for measuring fair value, and insights into how these costs impact overall compensation expenses. By requiring these disclosures, investors gain a clearer understanding of how share-based payments affect a company's financial position and performance, ultimately aiding in better investment decision-making.

Related terms

Fair Value: The estimated price at which an asset or liability would trade in a competitive auction setting; crucial for determining the value of share-based payments.

Stock Options: A type of equity-settled share-based payment where employees are given the right to purchase company stock at a predetermined price, typically to incentivize performance.

Compensation Expense: The expense recognized by a company in its financial statements for the value of share-based payment awards granted to employees.