This free, guided checker walks your finance team through the key decision points for ASC 718 Share-Based Compensation Classification. Answer a few questions to see the likely treatment and the evidence to document.
Answer a few quick questions below. It is private - nothing is submitted or stored - and takes about a minute.
This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
Here is what the checker asks and why each step matters. Prefer to talk it through? Contact us and we will help directly.
Start with the settlement terms: an award that obligates the entity to transfer cash or other assets, or that lets the holder compel cash settlement, is a liability regardless of its legal form. Cash-settled stock appreciation rights and phantom stock are the classic examples. A common trap is assuming that because an award references shares it must be equity - the settlement mechanics, not the label, govern classification under ASC 718-10-25-11.
Cash settlement obligation - classify the award as a liability under ASC 718-10-25-11.
Official guidance: FASB Accounting Standards Codification
Test the underlying shares as if they were issued today: if they would be liabilities under ASC 480 - for example mandatorily redeemable preferred stock - then an option or similar award written on those shares is also a liability. Review the redemption and conversion terms of the underlying class, not just the award. The trap is analyzing only the award and overlooking a redemption obligation embedded in the underlying share class under ASC 718-10-25-7.
Underlying shares are ASC 480 liabilities - classify the award as a liability under ASC 718-10-25-7.
Official guidance: FASB Accounting Standards Codification
Evaluate whether the holder can avoid the risks and rewards of ownership for a reasonable period, using six months after vesting or issuance as the practical benchmark. A put or call exercisable within that window, or a repurchase the entity is expected to make within it, results in liability classification. Note the asymmetry: an entity call at fair value that the holder cannot compel generally does not trigger liability treatment, so read who holds the option and at what price under ASC 718-10-25-9.
Repurchase feature avoids ownership risk - classify the award as a liability under ASC 718-10-25-9.
Official guidance: FASB Accounting Standards Codification
Identify every factor that changes vesting or the settlement amount, then classify each as a market, performance, or service condition. If any factor is something else - a commodity price, an unrelated index, or an inflation measure - the award is a liability under ASC 718-10-25-13. The common error is treating a revenue or earnings target (a performance condition) the same as an external index; only conditions outside the market, performance, and service categories drive liability classification here.
Indexed to a factor other than market, performance, or service - liability classification under ASC 718-10-25-13.
Official guidance: FASB Accounting Standards Codification
Net share settlement for taxes up to the maximum statutory rate does not by itself trigger liability classification; withholding in excess of that amount does. A broker-assisted cashless exercise also does not preclude equity classification.
Excess tax withholding - classify the entire award as a liability under ASC 718-10-25-18. No net share-settlement trigger - continue to the contingent cash settlement screen.
Official guidance: FASB Accounting Standards Codification
A cash settlement feature triggered only by a contingent event does not by itself require liability classification; test whether the event is within the holder's control and whether it is probable. Classify the award as a liability when a contingent cash settlement event outside the holder's control becomes probable, and reassess that probability each reporting date. A common misstep is treating every change-in-control clause as a liability trigger even though settlement remains equity until the event is probable.
Contingent cash settlement is probable - classify the award as a liability under ASC 718-10-25-14 through 25-15.
Official guidance: FASB Accounting Standards Codification
This step does not change equity classification; it identifies how the condition affects measurement and the timing of cost. Market conditions are built into grant-date fair value and are never reversed for failure to meet the target, whereas performance conditions drive whether and when cost is recognized based on probability. The common error is reversing compensation cost when a market condition is not achieved, which ASC 718 prohibits once service has been rendered.
Equity award with a service condition - recognize cost over the requisite service period under ASC 718-10-25-20. Equity award with a performance condition - recognize cost when achievement is probable under ASC 718-10-25-20. Equity award with a market condition - reflect it in grant-date fair value under ASC 718-10-30-14. Equity award with combined conditions - measure the market condition in fair value and assess the others for vesting.
Official guidance: FASB Accounting Standards Codification
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