How to Expense Stock Options Under ASC 718
To incent and retain key employees, many private companies choose to issue stock option grants or restricted stock units. What they may not realize, however, is that those options need to be recorded as an expense on the company’s financial statements. While this may sound straightforward, expensing options can be quite complex.
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Strike price, which is the price at which the option can be exercised.
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Price of the underlying security, which is the price assigned to the company’s common stock as determined by an independent 409A valuation.
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Term of the option, which is its time to expiration.
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Volatility of the price of the underlying security—or the variance of the stock price over time—which can be difficult for private companies to calculate as their stock doesn’t trade.
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Annualized interest rate, which is generally calculated by using the interest rates on US Treasury Bonds as a proxy.
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