# Stock compensation accounting under ASC 718 and IFRS 2

Canonical: https://finbryn.com/us/services/technical-accounting-advisory/stock-compensation-asc-718-ifrs-2

Finbryn provides stock compensation accounting under ASC 718 and IFRS 2 for venture-backed and PE-backed companies: fair value and expense schedules, journal entries and draft footnotes from your valuation inputs. Checked 2026-10-16: ASU 2024-01 sets an ASC 718 scope test for profits interests, effective for private companies from annual periods beginning after December 15, 2025.

Stock compensation turns a promise into an expense. When a company grants options, restricted stock units or profits interests, ASC 718 usually has it measure the award at fair value on the grant date and spread that cost over the service period. The inputs come from outside the accounting team: a share price from a valuation report, volatility and term from a model. The accounting wrapped around those inputs is what this page covers.

Finbryn calculates expense, builds the vesting schedules and prepares journal entries and draft disclosures from the fair value inputs the company supplies. Finbryn does not perform 409A valuations and issues no valuation opinion. Management owns the conclusion and the company's auditor decides whether it is acceptable.

The work usually starts from one of four triggers. An auditor asks for the expense calculation behind the equity roll-forward. A new financing round forces a look at every grant since the last one. A company with an LLC structure issues profits interests and wonders whether they are inside ASC 718 at all. Or a US subsidiary's parent grants shares in its own stock and the group reports under IFRS 2. Each one gets a schedule the controller can maintain after we hand it over.

If the same round also issued SAFEs or warrants, the classification question sits on the [convertible notes, SAFEs and warrants page](/services/technical-accounting-advisory/convertible-notes-safes-warrants-accounting). If the auditor wants the reasoning on paper, the [technical memo page](/services/technical-accounting-advisory/technical-accounting-memos-position-papers) shows what the write-up contains. For the broader startup picture, the [startup accounting guide](/guides/startup-accounting-guide) covers the books around the cap table.

What you get: Grant ledger reconciled to the cap table and board approvals; Grant-date fair value and expense schedule by award and period; Forfeiture, modification and cancellation treatment documented; Journal entries to compensation expense and equity; Draft stock compensation footnote and award roll-forward

Software we work in: Carta, Pulley, Microsoft Excel, QuickBooks Online

## What does ASC 718 require you to record?

ASC 718 applies when a company gets goods or services by issuing shares, options or other equity instruments, or by taking on liabilities tied to the price of its shares. The scope test is paragraph 718-10-15-3, reproduced in [FASB's ASU 2024-01](https://storage.fasb.org/ASU%202024-01.pdf).

For an equity-classified award, the company measures fair value on the grant date and does not remeasure it. Expense runs over the requisite service period. Three details drive most of the workpapers:

- **Service and performance conditions** change when expense is recognized, not the grant-date fair value. An award that vests only on a sale or IPO raises the question of when that event becomes probable.
- **Market conditions**, such as a share price target, sit inside the fair value, so the expense stays even if the target is missed.
- **Liability-classified awards**, such as cash-settled appreciation rights, are remeasured every period until they settle.

IFRS 2 shares the fair-value-at-grant idea for equity-settled awards. It adds a requirement to estimate the number of instruments expected to vest and to revise that estimate when new information arrives (IFRS 2, paragraph 20).

## Can you use your 409A report for ASC 718?

Often yes, for one input. [ASU 2021-07](https://storage.fasb.org/ASU%202021-07.pdf) (October 2021) lets a nonpublic company determine the current price of its shares through the reasonable application of a reasonable valuation method. It names a reasonable valuation done under the Treasury regulations for Section 409A as an example of meeting that practical expedient.

The expedient has conditions. The valuation has to weigh all information material to the value of the company, it has to be updated for later information that may materially affect value, and it can't be calculated more than 12 months before the date it supports. A priced round, a large customer loss or a signed letter of intent can each make an older report stale. The 409A regulation, [26 CFR 1.409A-1(b)(5)(iv)(B)](https://www.ecfr.gov/current/title-26/section-1.409A-1), carries the same 12-month and material-information limits.

Two boundaries matter. The expedient covers the share price only. Volatility, expected term, the risk-free rate and dividend yield still need support, and a nonpublic company that can't reasonably estimate its own volatility may use a calculated value based on the historical volatility of an appropriate industry sector index (FASB Statement 123(R), the source of that ASC 718 choice). And the expedient is for equity-classified awards, so liability awards stay on the fair value path.

## How are profits interests accounted for under US GAAP?

Whether a profits interest sits inside ASC 718 depends on its terms. [ASU 2024-01](https://storage.fasb.org/ASU%202024-01.pdf) (March 2024) added an illustrative example with four fact patterns to paragraph 718-10-55-138 onward, and the table summarizes them.

| Fact pattern | Inside ASC 718? | Why |
| --- | --- | --- |
| Case A: units vest on three years of service or an exit event, then share pro rata in the residual after a threshold | Yes | Holders participate in the residual interest, so condition (a) is met |
| Case B: units vest only on an exit event and are forfeitable until then, with nonforfeitable operating distributions from grant | Yes | Condition (a) is met; the distributions follow paragraph 718-10-55-45 |
| Case C: phantom units paid in cash on exit by reference to the Class A price | Yes | Fails (a) but meets (b)(1), because the cash is based on the share price |
| Case D: right to one percent of the prior year's net income after three years, nothing on exit | No | An operating metric, not the share price, and no obligation to issue shares |

For entities other than public business entities, the Update applies to annual periods beginning after December 15, 2025. Companies may apply it retrospectively or prospectively to awards granted or modified on or after adoption, and early adoption is permitted. If your units look like Case D, the right Topic is one other than ASC 718, and the memo says why.

## What changes with forfeitures, tax withholding and cash flows?

[ASU 2016-09](https://storage.fasb.org/ASU%202016-09.pdf) simplified several parts of ASC 718, and a few of its choices still shape the schedule you'll maintain. The table sets US GAAP beside IFRS 2.

| Topic | US GAAP (ASC 718) | IFRS 2 |
| --- | --- | --- |
| Forfeitures | Entity-wide policy: estimate expected forfeitures, or account for them as they occur | Estimate the number expected to vest and true it up |
| Net share settlement for tax | Equity classification allowed up to the maximum statutory withholding rates | June 2016 amendment covers net settlement for withholding tax |
| Income tax effects | All excess tax benefits and deficiencies go through income tax expense (ASU 2016-09) | Deferred tax follows the estimated future deduction, with any excess over cumulative expense recognized in equity (IAS 12, paragraphs 68A to 68C) |
| Expected term | Nonpublic practical expedient available | Estimated; no private company expedient |
| Liability awards | Nonpublic one-time election to switch to intrinsic value | Cash-settled awards remeasured at fair value each reporting date |

Pick the forfeiture policy once, write it into the accounting policy note and keep to it. A switch needs a preferability argument, and it changes prior-year comparatives in a way your investors will ask about.

## What if the parent grants the shares?

A US subsidiary of a foreign parent often has employees who hold the parent's options. [IFRS 2](https://www.ifrs.org/issued-standards/list-of-standards/ifrs-2-share-based-payment/) deals with this directly in paragraphs 43A to 43D. The entity receiving the services measures them as equity-settled when the awards are its own equity instruments or when it has no obligation to settle, and as cash-settled otherwise. The entity that settles the award recognizes it as equity-settled only if it settles in its own equity instruments.

That means the parent's consolidated IFRS 2 expense and the subsidiary's own figure can differ. The IFRS Interpretations Committee noted in its May 2013 agenda decision that intragroup recharges for these awards are recognized with diversity in practice, so the group policy manual matters.

On the US GAAP side, the subsidiary generally recognizes the cost of services its employees provide. Finbryn builds the subsidiary schedule under ASC 718 and the bridge to the parent's IFRS 2 number, then feeds it into the [IFRS reporting pack](/services/month-end-close-reporting/ifrs-reporting-packs-us-subsidiaries) and, where the group consolidates, into the [consolidation workpapers](/services/month-end-close-reporting/consolidations).

## What do you send, and what do you get back?

You send the option plan, the executed award agreements or the grant ledger, board and compensation committee approvals, the cap table, each valuation report with its date, and any modification history. For a subsidiary of a foreign parent, add the parent's grant list and its policy manual.

You get back:

- A grant ledger reconciled to the cap table and the board approvals, with exceptions listed.
- An expense schedule by award and by period, with the inputs behind each grant's fair value cited to a source document.
- Journal entries to compensation expense and equity, and a roll-forward of awards outstanding.
- A draft footnote and a one-page policy statement covering forfeitures, expected term and valuation support.

Your controller owns the numbers after handover. The schedule is built in Excel or your cap table platform's export, so a new hire can update it without us.

## The process

1. **Collect the award documents**: Plan, grant agreements, approvals, cap table and every valuation report with its valuation date.

2. **Reconcile the grant ledger**: Match each grant to board approval and the cap table, and list exceptions before any expense is calculated.

3. **Test the scope and classification**: Decide for each award type whether it is inside ASC 718 and whether it is equity- or liability-classified.

4. **Build the expense schedule**: Grant-date fair value from the inputs you supply, vesting, forfeiture policy and modifications, by award and period.

5. **Draft entries and disclosures**: Journal entries, roll-forward and footnote text for your controller to edit and adopt.

## Common problems we fix

| The problem | How we fix it |
| --- | --- |
| The 409A report is more than 12 months old, or a financing closed after it was issued | We flag the grant dates it can no longer support and list which grants need a refreshed valuation from your provider before the auditor asks. |
| Nobody can say whether the profits interests are inside ASC 718 | Each unit class is tested against paragraph 718-10-15-3 and the four ASU 2024-01 fact patterns, and the conclusion is written down. |
| Expense is booked once a year from a spreadsheet that only one person understands | The schedule runs by award and month with inputs cited, so entries can be posted in the close and an auditor can follow them. |
| The parent's IFRS 2 figure doesn't match the subsidiary's books | A bridge shows each difference, such as settlement obligation or recharge treatment, one line per award group. |

## By the numbers

| Figure | What it means | Source |
| --- | --- | --- |
| 12 months | Longest gap between a valuation date and the grant it supports under the ASU 2021-07 practical expedient | [storage.fasb.org/ASU%202021-07.pdf](https://storage.fasb.org/ASU%202021-07.pdf) (2021-10-01) |
| 4 fact patterns | Profits interest cases added to ASC 718 by ASU 2024-01, three inside the Topic and one outside | [storage.fasb.org/ASU%202024-01.pdf](https://storage.fasb.org/ASU%202024-01.pdf) (2024-03-01) |

## Glossary

- **Grant date**: The date the company and the recipient reach a mutual understanding of the award's key terms, which fixes the fair value measured under ASC 718.

- **Requisite service period**: The period over which the recipient has to provide service for the award to vest, and over which the expense is recognized.

- **Current price input**: The fair value of the underlying share, the input to an option pricing model that private companies find hardest to estimate.

- **Profits interest**: An interest in a partnership or LLC that shares in future profits or appreciation but not in existing net assets.

- **Modification**: A change to the terms of an outstanding award, such as a new exercise price or vesting schedule, which can trigger incremental expense.

- **Calculated value**: A substitute for fair value used by a nonpublic company that can't reasonably estimate its own volatility, based on the historical volatility of an appropriate industry sector index.

## Frequently asked questions: Stock compensation accounting under ASC 718 and IFRS 2

**Q: How do I calculate stock option expense under ASC 718?**

A: Measure fair value on the grant date with an option pricing model, multiply by the options expected to vest (or all options if forfeitures are recorded as they occur), and recognize the result over the service period. The share price input can rest on a 409A-style valuation under ASU 2021-07 if it is under 12 months old.

**Q: Can I use my 409A valuation for ASC 718?**

A: For the current price of the share, usually yes, if it meets the ASU 2021-07 conditions: all material information considered, updated for later events, and dated within 12 months of use. You still need support for volatility, term, risk-free rate and dividends. Finbryn does not perform the 409A valuation; your valuation provider does.

**Q: How are profits interests accounted for under US GAAP?**

A: They are inside ASC 718 when the units entitle the holder to equity-type participation or when cash payouts depend on the share price, as in Cases A to C of ASU 2024-01. A right tied only to an operating metric, as in Case D, falls outside. Private companies apply the Update from periods beginning after December 15, 2025.

**Q: Should I estimate forfeitures or account for them as they occur?**

A: ASU 2016-09 lets a US GAAP entity choose either as an entity-wide policy. IFRS 2 requires an estimate that is revised as information arrives. Companies with small grant populations often choose the as-they-occur policy because the schedule is simpler; the choice goes in the accounting policy note.

**Q: What changes under IFRS 2 for a subsidiary whose parent grants shares?**

A: Paragraphs 43A to 43D of IFRS 2 have the subsidiary assess the nature of the awards and its own obligations, so it can record a different amount from the group. The IFRS Interpretations Committee's May 2013 agenda decision recorded diversity in how recharges are recognized. Finbryn prepares the bridge for the reporting pack.

**Q: What will my auditor ask for on stock compensation?**

A: Typically the grant ledger tied to board approvals, the valuation reports with dates, the model inputs and their sources, the forfeiture policy and the expense recalculation. Under SAS 143 (periods ending on or after December 15, 2023) the auditor tests how management made the estimate, so the inputs file is part of the deliverable.

Related services:
- [Accounting for convertible notes, SAFEs and warrants](https://finbryn.com/us/services/technical-accounting-advisory/convertible-notes-safes-warrants-accounting)
- [Accounting position papers and technical memos](https://finbryn.com/us/services/technical-accounting-advisory/technical-accounting-memos-position-papers)
- [Consolidations](https://finbryn.com/us/services/month-end-close-reporting/consolidations)
- [Exit readiness](https://finbryn.com/us/services/virtual-cfo-advisory/exit-readiness)

Industries:
- [Startups and VC-backed companies](https://finbryn.com/us/industries/startups-vc-backed)
- [SaaS](https://finbryn.com/us/industries/saas)

Related guides:
- [The Startup Accounting Guide: Formation to First Audit](https://finbryn.com/us/guides/startup-accounting-guide)
- [US GAAP vs IFRS: Key Differences for US Companies](https://finbryn.com/us/guides/us-gaap-vs-ifrs-key-differences)
- [New US GAAP Standards Effective 2026 to 2028](https://finbryn.com/us/guides/new-us-gaap-standards-effective-2026-2028)

## Sources

1. [FASB, ASU 2024-01: Scope Application of Profits Interest and Similar Awards](https://storage.fasb.org/ASU%202024-01.pdf) (2026-10-16)
2. [FASB, ASU 2021-07: Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards](https://storage.fasb.org/ASU%202021-07.pdf) (2026-10-16)
3. [FASB, ASU 2016-09: Improvements to Employee Share-Based Payment Accounting](https://storage.fasb.org/ASU%202016-09.pdf) (2026-10-16)
4. [IFRS Foundation, IFRS 2 Share-based Payment](https://www.ifrs.org/issued-standards/list-of-standards/ifrs-2-share-based-payment/) (2026-10-16)
5. [eCFR, 26 CFR 1.409A-1 (stock not readily tradable, valuation presumptions)](https://www.ecfr.gov/current/title-26/section-1.409A-1) (2026-10-16)
6. [FASB Accounting Standards Codification, Topic 718 Compensation: Stock Compensation](https://asc.fasb.org/718/tableOfContent) (2026-10-16)
7. [IFRS Interpretations Committee, IFRS 2 Timing of the recognition of intercompany recharges, agenda decision May 2013](https://www.ifrs.org/content/dam/ifrs/supporting-implementation/agenda-decisions/2013/ifrs-2-timing-of-the-recognition-of-intercompany-recharges-may-2013.pdf) (2026-10-16)

Reviewed October 2026

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