When preparing your ASC 718 report, you will need to calculate the value of your option grants, report your expenses, and detail any disclosures. Most ASC 718 reports are prepared as an Excel spreadsheet, and you will likely want to ensure that the numbers are perfect to show investors and auditors how precise you are. If the working spreadsheet of your company’s disclosures looks like mumbo-jumbo to you, fear not, this blog post will walk you through the essential components and the useful information integral to the ASC 718 report.
An Overview of Your ASC 718 Disclosure Spreadsheet
Disclosures for the ASC 718 report are used primarily as a way of understanding how your accounting calculations were computed. Essentially, your company’s disclosures will probably be in the form of an Excel file that will include the expenses and cash flow associated with equity grants at your company. The ASC 718 report requires the disclosure of options and shares accounting, and some related metrics to help predict future expenses and liabilities.
The last step in the ASC 718 report preparation process is to create a detailed list informing the auditor about options granted, exercised, forfeited, and expired. While knowing the above gives you a crow’s-eye perspective into your spreadsheet, read on to understand the nitty-gritty sections of your file!
(Please note that this is not an all-encompassing list of disclosures. Your company’s unique position may require more or fewer disclosures depending on your situation. If you have any questions, you should consult with your accountant.)
First Things First: Documenting Option Grants
To more easily parse your spreadsheet, you will want to start at the beginning. Looking at the first section, you may notice that the report starts with a table for your option grant disclosures. Option grants are by far the most important disclosure that must be included in the report. You will want to be sure to detail all outstanding shares at the beginning and the end of the period and the actions that caused a change. The remaining disclosures report on vesting and exercise-related metrics.
In the table below, you can see an outline of what you should provide in the option grant disclosure. Notice that the number of outstanding options at the beginning of the reporting period has changed with regard to the number of outstanding options at the end of the period. As demonstrated below, this is because options are influenced by exercises and terminations.
Option Grant Disclosure
The disclosure of options is affected by exercises and terminations, so we’ve included a visual on how these actions can change the number in your report (see below). Many companies, especially on the West Coast, also allow for all grants to be exercised early. If this is the case for your company, the “Exercisable at End of Period” row will be equal to the amount of “Outstanding at End of Period.”
You may note that early exercise options are not treated in the same way as restricted stock awards (RSAs), and this is accounted for in the extra spreadsheet rows (option disclosures have more rows than do stock disclosures, which we will dive into subsequently).
Finally, take a look at the “Expected to Vest” column. Here, you will want to account for any potential future expenses. Insider tip: you will also be expected to report the weighted average of the exercise price (with the weight being the number of shares in the grant).
The Option Disclosure’s Simpler Twin: Accounting For Stock Grants
Now that you have fully parsed the option grant section, it is time to take a peek at the disclosures for stock grants. The disclosures for RSAs are similar to those of the option grants, but the process is much simpler since exercises are not involved. To illustrate the point, we have added a similar timeline below, for RSAs.
Stock Grant Disclosure
For stock grants, only the weighted average grant date fair value is reported. It can be calculated in the same way as described in the previous section.
Explaining Calculations: The Option Grant Statistics Section
You’re halfway through the disclosure process, and it is now time to provide the viewer with the information about the assumptions implicit in the Black-Scholes formula to determine fair value for your company’s option grants. You will probably want to include the range (the low and high values) for the weighted average expected term (in years), volatility, interest rate, and fair value.
The weighted average in the example below is weighted by the number of shares granted (the numbers are derived using the math in our prior blog post about calculating fair value). Hurray for completed calculations, this part of the process is easy-peasy since all the hard work has already been finished!
The Final Countdown: Evaluating Unaccrued Expenses
At this point, you will be excited to know that this is the very last element of your disclosure preparation. This final section includes projected future expenses (also known as unaccrued expenses) and the associated weighted remaining service period. Those two quantities allow accountants to predict the number of expenses that can be recognized within the next reporting period.
Total unaccrued expense is simply the difference between the total expense and the total accrued expense (unless the grant has been terminated).
If an example makes the calculation of unaccrued expense easier to comprehend, you may want to take a look at our white paper. There, we explain how an option grant with a fair value of $1.44 has a total expense equal to $2,880.00 and a total accrued expense equal to $2,162.88 (please note that both of these figures take a forfeiture rate into account). With this information, the total unaccrued expense for this grant comes out to $2,880.00 – $2,162.88, which equals $717.12.
It’s A Wrap!
Congratulations! Once you have worked through the valuation of your company’s options, reported all expenses, and completed the necessary disclosures, you are ready to sit back and relax–knowing that your accounting is in good shape and ready to be scrutinized by any auditor.
If you are interested in learning more about the ASC 718 process and the math behind option valuation, expenses, or disclosures, please look through our ASC 718 white paper written specifically with private companies in mind!
Screenshots are for illustrative purposes only.