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:
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The grants are authorized by the board of directors
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The recipient has begun performing services required to earn the grant
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The company and the recipient has agreed upon the terms and the conditions
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The company is legally obligated to issue shares/options when vesting conditions are met
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The recipient begins to benefit from, or be adversely affected by, changes to the company's stock price
ASC718 doesn’t specify what exactly determines an award to be ‘authorized’. Thus, whether awards have been sufficiently authorized may depend on the facts and circumstances involved. In general, the grant is considered authorized when all necessary board or shareholder approvals have been met and the grant recipient does not have the ability to further negotiate the terms and conditions of the arrangement.
The grant recipient must have already begun providing services to the company. The grant date cannot be established prior to the first day of employment.
The key terms and conditions of the award need to be defined and agreed upon. Both the stakeholder and company should know important details such as the exercise price or fair market value of the award and the required vesting conditions as of the grant date.
If the company has the option to not issue shares upon meeting the vesting conditions, then the grant date cannot be established. An exception to this would be if there is additional performance or market condition that must also be satisfied. For example, vesting occurs on the time-based schedule but is also subject to a liquidity event.
Some arrangements may provide the board with discretion over the payout of performance awards. If it’s unclear what situations this discretion would be exercised, this could prevent a mutual understanding of the terms of the award which would delay the grant date until the award is paid out.
If the exercise price is determined solely by a reference to a future date, the grant date doesn’t occur until that price is set because the stakeholder does not benefit or is adversely affected by the changes in the company’s stock price.
Equity can be complicated and the principles outlined above may not be enough to define the grant date for every single type of award. Companies that issue non-standard awards should consult their accounting professionals or auditors on defining an award’s grant date.