ASC 718 Compensation – Stock Compensation (formerly SFAS 123R) mandates the recognition of equity-based employee compensation as an expense. IFRS 2 Share-Based Payment contains similar requirements for the accounting of equity-based compensation according to the international financial reporting standards.
Valuation of equity-based employee compensation is also necessary in the context of tax compliance. Stock options and stock appreciation rights may be part of non-qualified deferred compensation plans regulated by Section 409A of the Internal Revenue Code. Compliance with Section 409A requires “a reasonable application of a reasonable valuation method” to determine the fair market value of the stock of a company that awards equity-based employee compensation.