Stock options are a common way to attract, incentivize, and retain great employees. But recording stock compensation expense on your company’s books can be daunting!
This blog is about going back to the basics in accounting, and the objective of the post is to walk you through the correct way to book stock compensation journal entry.
Some companies outsource this work to a consultant who specializes in Black Scholes valuation, other companies use cap table software with the functionality to calculate the Black Scholes model, and other companies do it all in excel. The inputs to Black Scholes are US Treasury risk free rate, volatility of comparable companies’ stock prices, and expected term of the options.
Journal: Stock Compensation Expense
Frequency: Typically monthly or annually
FloQast folder location (learn more about FloQast folders): ‘Equity’ but be sure not to share sensitive employee compensation details with your broader accounting team
The dr.’s and cr.’s
|12/31/17||Stock based compensation expense||$42,000|
Memo: To record stock compensation for FY17 for employee option holders
|12/31/17||Stock based compensation expense||$6,000|
Memo: To record stock compensation for FY17 for non-employee option holders
Reconciliation (click here for 3 best practice Excel reconciliation templates)
- Always make sure retained earning rolls forward year over year!
- There should be line items in your equity recon for all of the stock option expense over time
- Not getting timely 409a valuations done. This gives you your strike price if you’re not a publicly traded company. Option strike prices should be issued in accordance with the 409a findings.
- Nonstandard option grant terms like different vesting periods for employees can make administration difficult and may even create problems for the company or employees when it comes time to pay income tax.
How auditors audit
Auditors will spend a lot of time on equity, especially if it’s a first-year audit. It’s advisable to work with a corporate attorney or a tax CPA prior to issuing stock as compensation. They’ll check the terms and look out to prevent future headaches.