ASC 718 Stock Compensation: Compliance and Audit Readiness for CFOs

ASC 718 is the accounting standard that governs how companies measure, recognize, and report stock-based compensation. It's a mandatory requirement by the FASB for US private and public companies with equity-based programs, and it generally applies from your first priced round.

Deficiencies in stock compensation accounting can trigger questions from auditors and investors, and may cause delays in financings, complicate potential M&A activity, and affect credibility in your finance function. During key growth phases like preparing for a Series B, planning an IPO, or navigating an M&A process, ASC 718 compliance failures can become a blocker.

Let’s walk through what ASC 718 requires and how to build a compliance framework your team can own, without depending on external advisors or stitching together fragmented tools every reporting period.

What is ASC 718?

ASC 718 requires companies to recognize the fair value of equity-based awards as compensation expense over the requisite service period during which employees earn those awards. It applies to stock options, restricted stock awards, restricted stock units (RSUs), performance shares, and stock appreciation rights (SARs). 

Compliance isn't a one-time exercise. Every new grant, modification, forfeiture, and performance condition change creates expense recognition requirements. CFOs who rely on spreadsheets or fragmented systems quickly discover that manual tracking becomes unsustainable as equity programs scale. 

ASC 718 applies to both public and private US companies. The most common triggers that signal it's time to operationalize your compliance approach include:

• Your first priced funding round (Series A and beyond)
• Preparing for an initial audit
• When you start issuing equity-based compensation
• Pre-IPO readiness work

Why does ASC 718 stock compensation matter for CFOs?

For CFOs at growth-stage companies, share-based compensation is often a material line item in your financial statements. Getting the accounting wrong can create misstatements that auditors will flag and investors may question, and miscalculations can compound across reporting periods and require correction.

Three areas of ASC 718 accounting determine whether your stock compensation is accurate and audit-ready: fair value, service periods and vesting conditions, and equity versus liability classification. 

Determining fair value

Fair value is the starting point for ASC 718 expense recognition. It's the value assigned to an award for stock based compensation reporting purposes.

For stock options, this typically means applying the Black-Scholes model using inputs like expected term, volatility, risk-free interest rate, and dividend yield. For restricted stock, it's generally the fair market value of the underlying shares at measurement date.

Getting this number right matters as errors here don't stay contained. Auditors typically keep an eye out for miscalculations at grant date that can compound across reporting periods.

Understanding service periods and vesting conditions

Service periods and vesting conditions are where ASC 718 accounting gets complicated. The service period defines the timeframe over which the award's expense must be recognized, while vesting conditions determine when those awards are earned. Both directly affect how you recognize and report compensation expenses.

The critical distinctions CFOs must understand:

• Service conditions require only a passage of time (i.e. continued employment)
• Performance conditions depend on achieving specific metrics and affect both the timing and amount of expense recognition
• Market conditions like stock price targets are built in to the fair value calculation, and generally don't affect whether you recognize expense, even if the condition isn't met

When employees leave before their awards fully vest, they forfeit the unvested portion. Under ASC 718, companies must account for those forfeitures — either by estimating them upfront and adjusting as actuals come in, or by recognizing them as they occur. Whichever method you choose, it must be applied consistently and documented.

CFOs need contemporaneous evidence of when grants were approved, what the vesting terms were, and how the team is tracking service completion. If your current system can't automatically calculate quarterly expenses, or can't produce proof for fair value assumptions, you're carrying unnecessary audit risk into every close.

Equity versus liability classification

One of the most consequential impacts you'll make is whether an award should be expensed under Equity Accounting or Liability Accounting. Under Equity Accounting, awards are measured once at the grant date and aren't measured again later. Under Liability Accounting, awards must be remeasured at fair value every reporting period until settlement, which can create more expense volatility as compared to Equity Accounting. 

The most common trigger for liability treatment is if the award has cash settlement features. For example, if your equity plan allows employees to demand cash instead of shares, you're likely looking at liability treatment.

Address classification questions before grant date. The wrong call can trigger audit adjustments or restatements, and it's far more expensive to remediate after the fact than to get it right upfront.

ASC 718 Compliance requirements and measurement fundamentals

Understanding fair value, service periods and vesting conditions, and equity classification is the foundation. Putting them into practice accurately, and keeping them that way, is a different challenge.

Auditors don't only check your calculations. They check whether your methodology was consistently applied, and whether there is proof for the assumptions you used to calculate fair value. That means maintaining clear documentation of valuation assumptions, expense recognition methodology, and any modification events that affected award terms. Using different assumptions across grants without justification, or switching recognition methods without clear rationale, creates discrepancies that extend audit timelines and invite follow-up questions.

Modification accounting is also one of the most commonly missed requirements at growth-stage companies. Repricing options, extending an exercise window, or accelerating vesting may trigger an incremental expense — and each one needs its own documentation trail.

Pulley's cap table management maintains grant records, audit trails, and vesting schedules. For clients on our Enterprise plan, Pulley's ASC 718 reporting tool automates expense calculations, auto-tracks modifications, and calculates incremental expense. Using Pulley's ASC 718 reporting tool, finance teams can close each reporting period efficiently as Pulley automatically pulls in the most recent cap table information to calculate stock-based compensation expense..

Navigating ASC 718 implementation approaches

Your implementation approach will directly determine whether your quarterly close takes hours or weeks and whether your next audit surfaces material calculation issues.

• Manual spreadsheet approaches remain common at startup companies, but they introduce compounding risk as equity complexity rises. Spreadsheets may work at small scale, but as equity programs grow, the increasing complexity typically outpaces what a spreadsheet can sustain.
• Outsourced accounting firms can fill gaps in technical expertise, but they introduce their own limitations. External advisors work with the data you give them, and if your internal records are incomplete or inconsistent, the output reflects that. They also add cost and turnaround time to every close cycle, and they don't solve the underlying infrastructure problem.
• Point solution combinations solve some spreadsheet problems while creating new ones. You gain better calculation accuracy within each system, but managing data synchronization across platforms creates reconciliation gaps that become material findings.
• Integrated equity management platforms like Pulley eliminate these fragmentation risks by maintaining a single source of truth for all ASC 718 stock compensation data. Your fair values, vesting schedules, modification tracking, and expense calculations live in one system with built-in audit trails.

Essential documentation and evidence packs

Auditors require evidence. The documentation you need falls into three categories: grant-level evidence, valuation support, and expense calculation trails.

The documentation auditors typically need for ASC 718 includes:

• Fair value assumptions and the details backing these assumptions
• Grant agreements and board approval minutes, to verify award terms such as vesting schedules and modification terms, if applicable

Your valuation documentation must demonstrate how you determined fair value and why your methodology is defensible. Auditors want to see the assumptions that drove your calculations, not just the final output. They also expect complete disclosures and footnotes in your financial statements — specifically, quantities by status (exercised, cancelled, or expired) by award type, the valuation assumptions underlying your fair value calculations, and vesting schedule summaries. Fully-formulated reporting that packages these disclosures in a ready-to-review format is what auditors prefer: it reduces their prep time and shortens review cycles. Pulley produces this level of reporting automatically.

A company with 200 equity grants might need to produce two, three, or even four times more individual documents to create an adequate proof trail to satisfy auditors. Spreadsheet-based systems make this nearly impossible to manage at scale.

Avoiding common audit deficiencies

Auditors consistently flag the same ASC 718 issues across engagements. The most common deficiency is incomplete or missing grant documentation. When documents are incomplete, reconstructed after the fact, or inconsistent with your cap table, you're inviting material weaknesses and extended audit timelines.

Inconsistent fair value calculations represent another frequent failure point. If your valuation methodology changes regularly, without documented justification, auditors will challenge your expense measurement and recognition.

Other common deficiencies include:

• Inadequate controls around grant approvals and data entry
• Missing evidence of board or compensation committee authorization
• Vesting schedules that don't reconcile to your equity management system
• Expense calculations that can't be traced back to supporting documentation

Build your compliance infrastructure to withstand scrutiny before auditors arrive. Waiting for audit findings to drive remediation is far more costly. Pulley's cap table management maintains complete grant histories with audit trails, and our ASC 718 reporting tool automatically generates detailed fair value assumptions and expense calculations, making it easier to pull the documentation auditors need any time.

Building your ASC 718 compliance roadmap for sustainable operations

Sustainable ASC 718 compliance requires a deliberate, systematic approach integrated into your regular close process. Start by assessing your current state: what grants exist, how you're tracking them, and where gaps exist in measurement and documentation. 

Most finance teams discover significant inconsistencies during this exercise. Identifying these issues before an audit gives you time to remediate them properly. Next, establish a repeatable process that treats ASC 718 compliance as a standard close activity:

• Centralized grant tracking: Maintain a single source of truth for all equity grants, modifications, and cancellations with complete audit trails
• Automated expense calculations: Eliminate manual spreadsheet calculations that introduce errors and can't scale beyond a few dozen grants
• Standardized documentation: Build evidence packs that include board approvals, fair value assumptions, and detailed vesting schedules
• Regular close checkpoints: Verify that all grants issued during the period are properly valued and recorded, review forfeitures and modifications, confirm expense recognition aligns with vesting schedules, and reconcile cumulative expense to date.

As your equity program grows, your compliance infrastructure must evolve from manual tracking to integrated systems that provide real-time accuracy and complete audit trails. 

Learn how Pulley streamlines ASC 718 compliance, transforming equity management from a regular hassle into a sustainable, audit-ready process that supports your company's growth trajectory.

ASC 718 stock compensation FAQs

What's the difference between ASC 718 and IFRS 2?

ASC 718 is the US GAAP standard governing stock-based compensation for US-domiciled companies. IFRS 2 is the international equivalent used elsewhere, such as in Europe, Canada, and Australia. Both share the same core principle but have different rules when it comes to nuances, like expense amortization requirements, expected term assumptions, and modification accounting treatments. If you have international entities, confirm with your auditors which standard applies.

Do private companies need to follow ASC 718?

Yes. ASC 718 applies to both private and public US-domiciled companies that issue equity-based compensation. Note that international public companies generally fall under IFRS 2 rather than ASC 718, though companies with foreign-related entities may need to report under both standards. If you have audited financials or are preparing for them, compliance is mandatory. 

Yes. ASC 718 applies to both public If you’ve audited financials or are preparing for them, compliance is mandatory. Learn more about what ASC 718 requires.

How does ASC 718 relate to a 409A valuation?

A 409A valuation determines the fair market value of your common stock and is one of the primary inputs for calculating grant-date fair value under ASC 718. Stale or undocumented 409A valuations create problems auditors will find. Treat your 409A as a living input to your stock-based compensation accounting, not a once-a-year checkbox.

What triggers a modification under ASC 718?

A modification occurs when you change an award's terms in a way that affects its fair value vesting conditions, or balance sheet classification. Examples include repricing options, extending an exercise window, or accelerating vesting upon termination. 

Each modification requires measuring fair value before and after modification. This may result in incremental expense. Pulley's ASC 718 reporting tool auto-tracks modifications and automatically calculates if there is any incremental expense. Learn more about how modifications are handled.

When should a company start preparing for ASC 718 audits?

The right time to start depends on your company's complexity and growth stage. Common triggers include closing your first priced funding round, beginning to issue equity-based compensation, preparing for an initial audit, or starting pre-IPO readiness work.

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