Stock Compensation: When Does the Company Record Expense?
The company may not pay cash, but employee service still has a cost that must be recognized.
Grant-date measurement
Equity-classified awards generally use grant-date fair-value concepts under the applicable guidance.
Service period
Compensation cost is recognized over the period in which the employee provides the required service.
Restricted stock
Restricted shares can have vesting requirements, and accounting reflects the compensation value associated with the award and service period.
Stock options
Options require valuation because the exercise price alone does not measure compensation cost.
Forfeitures
Apply the applicable accounting policy and facts rather than assuming every granted award will vest.
The takeaway
Compensation expense follows the value of employee service represented by the award, not simply cash paid.
Related Summit guides
FAQ
Does expense wait until exercise?
Not generally for a standard equity-classified award.
Why is grant-date fair value important?
It is central to measuring many equity-classified awards.
Does vesting matter?
Yes.