Since the issuance of FASB Accounting Standards Codification Topic 718 (“ASC 718”), valuing stock-based compensation has been a challenge for private companies. For financial reporting purposes, ASC 718 (formerly FASB Statement No. 123) generally requires that all equity awards granted to employees be accounted for at “fair value.” To meet the fair value measurement objective, the valuation must be based on established principles of financial theory and reflect the characteristics of the instrument. This fair value is measured at the grant date for stock-settled awards and at the subsequent exercise or settlement date for cash-settled awards. Fair value is equal to the underlying value of the stock for “full value” awards such as restricted stock and performance shares, and estimated using an option-pricing model with traditional inputs for “appreciation” awards such as stock options and stock appreciation rights.
