American Society of Appraisers Business Valuation Committee Special Topics Paper #5 Consideration of Stock-Based Compensation in the Valuation Process

Under FASB Accounting Standards Codification 718 (formerly FAS 123[R]), equity compensation granted to employees is valued at fair value at the time of the grant and then expensed. Valuation analysts routinely quantify the dilutive effect that stock-based compensation (SBC) has on entity equity value. This dilution can be attributed to SBC that was granted in periods prior to the valuation date and SBC that is expected to be granted in future periods. It is important that the valuation analyst understands the characteristics of the different types of securities that give rise to shareholder dilution and how to properly account for the dilutive effect of these securities. This technical paper provides an overview of the accounting treatment of SBC and a discussion of the methods to address SBC in the valuation process when estimating entity equity value.