Financial Reporting

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Expense Attribution Methods

By Calvin Cheng posted 07-02-2023 01:21


After the expense for an option or award is determined, the expense is recognized over the service period of the award.  Carta's reports can amortize stock compensation expense on a graded straight-line basis where the expense for each vesting tranche is recognized sequentially or under the FIN28 approach where expense for each vesting event is recognized concurrently.

Accounting principles when amortizing expense:

  • Expense is recognized throughout the service period of the award

  • The total expense recognized to date must be at least the fair value of what has legally vested (sometimes referred to as the 'floor' concept)

  • Awards with performance/milestone based vesting schedules will default to the FIN28 method.

    • Companies who want to use straight line may manually change attribution methods by award within the fair value assumption settings page

  • Expense scenarios under the IFRS standard can only use the FIN28 methodology

It is common for companies to offer awards that vest in stages (tranches).  Since vesting may begin prior to an award's grant date, different tranches may require varying times to vest.  A traditional straight line method that simply dividing the total fair value by total numbers of days (or months) to vest may sometimes result in less expense being recognized than what has vested. To ensure compliance with the "floor" concept, Carta's reports will treat each vesting tranche as an individual award.

For example, let's assume an award for 36,000 options is granted on December 1, 2021 and vests annually over 4 years at 9,000 options a year.  The fair value is $1.00 per option bringing the total fair value to $36,000 and is recognized throughout the service period, starting on the grant date.

The 'tranches' tab within our reports lists each vesting tranche and has a couple columns that define that specific vesting tranche's service period start date and the service period end date.  

This is a simplified overview on how expense for the period is calculated within the 'tranches' tab:

  1. Determine the total fair value of each vesting tranche (column L)

  2. Determine the % of service completed (column O) by dividing the number of service days completed (column M) and the total service days (column N)

  3. Multiply % of service completed for the cumulative expense to date

  4. Expense for the period (column R) is the cumulative expense (column P) minus what has already been recognized in prior periods (column Q)

Under the straight line method, vesting tranches are expensed sequentially so the start of the service period for subsequent tranches is either the grant date (shown in green) or the vest date of the prior tranche (shown in blue).  The service period end date is the vest date.






This is the schedule of how the total fair value of $36,000 is recognized each year under the straight line method:

Under the FIN28 method, vesting tranches are expensed concurrently so the start of the service period for all vesting tranches is the grant date (shown in green).  The service period end date is the vest date (shown in purple).







This is the schedule under FIN28:

Under the straight line method, expense recognized each year doesn't vary much ($10,988.16, $8,991.85, and $9,008.15 for 2022, 2023, and 2024, respectively).  Under the FIN28 method, more expense is recognized up front ($18,821.91, $9,103.09, and $4,598.41 for 2022, 2023, and 2024, respectively).

The policy decision regarding the attribution should be made when a company implements its first stock compensation program and apply it consistently across all service based grants.  Those wishing to change attribution methods will have to demonstrate that the new method is better suited to the grants and may be required to file a preferability letter from the company's auditors with their financial statements for the period in which the change was made.

Did you find this post helpful or have any further questions?  Please reach out Carta's dedicated Financial report team with any comments or feedback by emailing us at