As a business owner, staying on top of the latest accounting practices relating to employee stock-based compensation is vital. Staying in compliance can help protect both you and your team from any potential issues down the road.
ASC 740 (the Accounting Standards Codification) is an important area of accounting information related to employee benefits, and it affects how companies handle their stock-based compensation. ASC 740 provides the framework for accurately reporting stock-based compensation from startup businesses to larger companies.
This blog post will explore how ASC 740 impacts stock-based compensation and discuss strategies for compliance with all relevant regulations. Whether you’re considering setting up a new system or looking into the implications of existing programs, this post has something for everyone.
What is Stock-Based Compensation?
Stock-based compensation is a popular way for companies to incentivize their employees. Companies can reward exceptional performance by offering stocks or other financial packages, like options and awards, while allowing their employees to thrive financially.
Not only can this be a great motivation tool in the workplace, but it can also help to build morale by allowing each staff member to become an integral part of the company’s success. It’s a win-win situation where employees reap the benefits of owning the organization, and employers enjoy improved job satisfaction from happier, more productive employees.
Ways To Give Stock-Based Compensation To Employees
Investing in company stock is often attractive and lucrative for employers and employees. However, giving stock or stock options through a compensation model isn’t as straightforward as it may seem when sharing this asset. There are three ways to do it: incentive stock options (ISOs), restricted stock units (RSUs), and nonqualified stock options (NSOs).
ISOs are grants of rights to buy company stock at a pre-determined price over a set period. RSUs are also grants of company shares under certain conditions. And NSOs differs from the prior two in that they are not treated as favorably for tax purposes, so they can be used more broadly than ISOs or RSUs. Understanding each is the first step to effectively investing in your business’s future!
How ASC 740 Affects Stock-Based Compensation
When you get stock-based compensation, it can have implications for your taxes. Nonqualified options and restricted stocks are typically temporary items that result in a corporate tax deduction down the line, so keep this in mind when dealing with any payment tied to company shares.
Incentive stock options come with a significant tax benefit for employees, but savvy business owners and their talented staff should consider all the nuances between them. Strategic planning allows you to maximize your company’s worth and benefits.
Key Terms To Track For Stock Compensation
You should always track critical terms regarding stock compensation and ensure you’re getting what you owe. These include exercise data, vesting date, grant date, vesting or service period, and exercise or strike price.
Exercise data refers to the number of shares you have been granted from your employer; the vesting date tells you when those shares become available for you to use; the grant date offers insight into how long it will take for them to become available for use.
The vesting or service period provides context around why specific actions have been taken and when. Your options’ exercise or strike price explains their value and informs whether it’s worth exercising those options at a given time. Tracking these terms can help ensure your stock compensation program works in your favor.
How ASC 740 Affects Stock-Based Compensation – In Conclusion
Protecting investors and giving employees a voice in their company’s operations are the driving forces behind new regulations from the Financial Accounting Standards Board (FASB). If you’re offering stock-based compensation to your team, staying up-to-date with relevant accounting standards is critical.
With such drastic changes to the accounting world, companies need to hire professional business services to properly handle the implications of ASC 740 on their financial trajectory. It’s usually wise for businesses to be proactive and have their stock-based compensations reviewed before filing for taxes or when selling their stocks or other assets.
Understanding how this dynamic new guidance affects your company can mean the difference between success and failure. So, companies should seek professional help when considering any significant financial decisions related to this accounting standard. Not taking the time to review could lead to costly and time-consuming problems.