Community blogs

Non-Employee Award Valuation (ASC 505-50 & ASU 2018-07)

By Calvin Cheng posted 11-25-2024
Historically under ASC 505-50, non-employee awards were valued on the date the equity award was earned (the vest date) while employee awards were valued on the date the equity award was granted (the grant date). Using mark-to-market accounting, the hope was to more accurately measure non-employee awards as the underlying value of the company’s stock fluctuates over time. This was later amended with ASU 2018-07 which have both non-employee and employee awards valued a single time on the grant date. The latest a company could adopt ASU 2018-07 was the company’s fiscal year after December 2019. Let’s look at an example where the same award of 1,000 ...

Graded Straight Line Amortization

By Calvin Cheng posted 11-24-2024
The straight line amortization method is the idea of expensing an equity award of each vesting tranche sequentially where the first vesting tranche is fully expensed before the subsequent vesting tranche begins to expense. For awards with multiple vesting tranches, Carta’s SBC expense reports will treat each vesting tranche as its own award with its own service period (ASC 718-10-35-8a) to ensure the minimum amount of expense recognized is at least the fair value of what has vested. Service Periods Each vesting tranche is assigned its own service period. The service period cannot begin until the award is authorized ...

How SBC Expense Is Calculated

By Calvin Cheng posted 11-23-2024
Carta’s SBC Expense Report will provide a journal entry for the period expense of the reporting period. To understand how that amount is determined, companies need to know how the cumulative amount of expense is determined. Afterwards, the current period expense is simply an adjustment between the cumulative expense in the current reporting period and the cumulative expense in the prior reporting period. Each reporting period will first determine the cumulative amount of expense that should be recognized by considering all the latest updates to the cap table including: New grants Terminations ...

Expensing Expired Stock Options

By Calvin Cheng posted 11-23-2024
A common question companies ask is whether they should reverse stock compensation expense on vested stock options that expire unexercised after the employee terminates service. The expense is actually related to the value of the stock option itself in exchange for the employee’s services, not for the actual delivery of common stock. Therefore, if the employee has earned/vested the stock option, the employee has received the promised value by being able to exercise and the company should recognize stock compensation expense for the services received from the employee. Previously recognized compensation cost shall not be reversed if an employee share ...

Volatility Inputs for 409a Valuations and ASC718

By Calvin Cheng posted 11-22-2024
Background A frequent question we get from companies is: Why is the valuation of stock options in Carta’s stock compensation expense reports using a volatility value that is different from the volatility value used in a 409a valuation report? Simply put, the two reports measure volatility over a different period of time and under a different methodology. Key Points The volatility assumption in the 409a valuation should not be used to value options under ASC718 A measurement of volatility over a different period of time will result in a different volatility The 409a valuation may use a percentile ...

Different Volatility and Interest Rates

By Calvin Cheng posted 09-25-2024
Why are different volatility and interest rate values being used to value stock options granted on the same date? Volatility represents the change in the value of stock over a specific period of time. The interest rate represents the risk-free interest that can be earned over a specific period of time. The specific period of time used in the Black Scholes option-pricing model is the expected term of an award. Carta calculates the expected term on the grant date using the SAB107 method, which is an average of the stock option’s vesting term and the contractual term: In many cases, the vesting ...

Stock Compensation Expense & Forfeitures

By Calvin Cheng posted 09-04-2023
When a stakeholder terminates service, vesting will cease and Carta’s SBC expense reports will stop recognizing any expense for vesting that occurs after the termination date. Any expense recognized for what has legally vested as of the termination date does not reverse because the stakeholder has legally earned the option/shares. Any previously recognized/accrued expense for what did not vest due to a termination will be reversed. Key terminology: Forfeited - Shares/options that are unvested at the time of a termination or cancellation. Expired - Options that vested but were not exercised within the post termination exercise period ...

What's the difference between FMV and FRV?

By Shevaun Cash posted 08-17-2023
What’s the difference between Fair Market Value (FMV) and Financial Reporting Value (FRV) ? If you use Financial Reporting, then you’ve probably noticed a change: FMVs are no longer called FMVs in your 718 dashboard. In fact, there is no FMV in the dashboard; now, there is FRV. What does that mean, anyway, and why did this happen? Though the terms “fair market value” and “financial reporting value” are related, they have distinct meanings in different contexts : Financial Reporting Value (FRV): The value of common stock for Financial Reporting purposes within Carta, and the output of the ASC 718 Memo. This FRV will ...

ASC 718 - Grant Date

By Calvin Cheng posted 08-15-2023
An equity award's fair value is measured on the award's grant date. The grant date is typically the start of the service period in which the company begins recognizing stock compensation expenses. Accounting principles that determine the grant date: The grants are authorized by the board of directors The recipient has begun performing services required to earn the grant The company and the recipient has agreed upon the terms and the conditions The company is legally obligated to issue shares/options when vesting conditions are met The recipient begins to benefit from, or be adversely affected ...

ISO / NSO Stock Compensation Expense

By Calvin Cheng posted 07-02-2023
In most cases, the expense a company recognizes for stock compensation differs from the tax deduction they are entitled to, in both timing and amount. For example, expense of the fair value for non-qualified stock options is recognized over the service period but the company does not qualify for a tax deduction of the spread or intrinsic value until the option is exercised. Companies that wish to record a deferred tax asset (DTA) may want to know how much expense has been recognized for certain award types. The ‘tranches’ tab within Carta’s SBC Expense Report lists the ISO and NSO quantity for each vesting increment of each award. ...

Stock Compensation Expense Report (a simplified overview)

By Calvin Cheng posted 07-02-2023
One of the reports in Carta’s Financial Reporting suite is the SBC Expense report. This report provides companies with a journal entry that debits the stock compensation expense account and credits the additional paid in capital account. Overtime, companies have requested this report to include more data. As a result there currently is a lot of things happening within this report. However, we only have to look at several columns to understand what is happening in the report. This walkthrough is intended to provide a simplified overview on how expense is determined for standard time-based vesting options and restricted stock. I will not talk ...

Black Scholes Option Pricing Model

By Calvin Cheng posted 07-02-2023
Black Scholes is perhaps the most well known of all option-pricing models. Developed by Fisher Black, Myron Scholes, and Robert Merton, the model received the Nobel Prize in 1997 for developing a way to estimate the price of European-style options that were publicly traded on option trading markets. Prior to this, options were traded without a way to measure the risk of the option nor its expected return. The formula provided mathematical legitimacy to option markets and created a boom to option trading in financial markets all around the world. The value of an option comprises two values, the intrinsic value and time value . The intrinsic ...

Expense Attribution - Service Period

By Calvin Cheng posted 07-02-2023
After the expense for an option or award is determined, the expense is recognized over the service period of the award. The service period is not always the vesting period. Grants issued to newly hired employees will begin vesting on the date of hire, which often precedes the grant date. Also, refresh awards that recognize an employee's contribution to date may begin vesting after the grant date. Accounting principles to determine the service period: The company begins recognizing expense on the grant date The service period start date can not occur before the award has been authorized The service ...

Graded Straight Line & Traditional Straight Line

By Calvin Cheng posted 07-02-2023
The graded straight line attribution recognizes the same amount of expense throughout the service period of each respective vesting tranche, as if each vesting increment is its own award. The traditional straight line (sometimes called true straight line) attribution recognizes the same amount of expense throughout the entire service period of the entire award. A traditional straight line approach may result in recognizing too little expense, especially when there are multiple vesting tranches and more shares vest earlier within the service period. Accounting principles for straight line attribution: Expense should be recognized throughout the ...

Expense Attribution Methods

By Calvin Cheng posted 07-02-2023
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) ...

Modification Accounting - Repricings

By Calvin Cheng posted 05-30-2023
When there is a decline to a company’s stock price, outstanding stock options with a high strike price may become ‘underwater’ and worthless. Since stock options are intended to serve as compensation, some companies may choose to reduce the strike price of underwater stock options. Lowering the strike price of an option is a Type I modification and is viewed as a cancellation of the original option with the original strike price and a grant of a replacement option with a new strike price. In most cases, lowering the strike price will result in an increase of compensation expense. The following accounting principles ...

Award Modifications

By Calvin Cheng posted 05-30-2023
A modification of an award happens when any of the following happen: The fair value of the award before the modification is different from the fair value after the modification. The conditions for vesting are modified. The accounting treatment changes from equity to liability or from liability to equity. Under the IFRS standard, all modifications are treated as a Type I modification. Under GAAP, there are four types of modifications along with multiple accounting treatments: Type I (Probable-to-Probable) Vesting is probable before and after the modification. Common modifications include: Reduction ...

How does Carta Community support finance professionals?

By Brent Devey posted 03-22-2023
The world of finance is constantly evolving, and professionals in this industry are always looking for new ways to stay on top of the latest trends and information. This is where the Carta Community comes in. Carta is a financial technology company that provides a wide range of services to help professionals manage their equity and ownership structures. Its Community platform is an online forum where finance professionals can connect, share knowledge, and collaborate on a variety of topics related to equity management. Here are some of the ways that Carta Community supports finance professionals: Networking opportunities One of the biggest benefits of ...

New 409A? Here’s How to Update Your FMV

By Shevaun Cash posted 02-09-2023
With the first quarter up and running, it’s highly possible that you recently went through the process of receiving your latest valuation. Your 409A page has been updated and you are no longer being reminded to request a new FMV. What a relief! You only have one task left: updating your FMVs section for your stock based comp (Compliance > Financial Reporting > FMVs). In theory, this should be the easiest part of your valuation journey. After navigating to the FMVs page, you click the black plus sign, enter the effective date along with the fair market value, and click “Save fair market values”...only to have the system respond by telling you that ...

Breaking Down Black-Scholes: Expected Term

By Calvin Cheng posted 02-07-2023
You record your stock comp expenses at least once a year, if not monthly, but how did the summary amount to what it did? To answer this question, we have to work backwards. The fair value of an award is key in calculating expenses, but before we can even get to that we must first understand where fair value comes from. At Carta, we determine fair value by using an option-pricing model called Black-Scholes. One of the many inputs of this equation is the expected term. The expected term represents the amount of time the award is expected to remain outstanding until it is exercised or terminated. Imagine having an option that expires today, ...