The Financial Accounting Standards Board announced on 2 July 2026 that it has opened a public consultation on potential changes to US GAAP rules governing the valuation of restricted stock awards. The proposal marks the first comprehensive review of ASC 718, the accounting standard for share-based compensation, in nearly two decades. The review seeks to address criticisms that current models fail to accurately capture the illiquidity discount of restricted shares, potentially leading to overstated compensation expenses.
Context — why this matters now
FASB last amended its guidance on share-based payments in 2006 with Statement No. 123(R). That update mandated that companies expense the fair value of stock options and restricted shares, a shift from previous practice. The current review was initiated after sustained pressure from corporate treasurers and compensation committees, who argue that a one-size-fits-all valuation approach distorts earnings for companies with high concentrations of restricted stock. The consultation launches amid a backdrop of elevated corporate share buybacks, which totaled over $1.2 trillion in 2025, and increased usage of restricted stock units in executive pay packages.
Critics of the existing standard contend that it ignores the material discount investors apply to restricted shares due to their non-transferability and vesting conditions. The current model typically values restricted stock at the full market price of the underlying common shares on the grant date. This methodology does not incorporate the same illiquidity discounts applied in other areas of financial reporting, creating an inconsistency in fair value measurement.
Data — what the numbers show
Restricted stock and unit awards comprise a significant portion of executive compensation. Over 85% of S&P 500 companies utilized restricted stock units in their long-term incentive plans in 2025. The technology sector leads in usage, with restricted stock representing an average of 60% of total CEO pay at major firms like Apple Inc. and Microsoft Corporation. The proposed changes could impact the reported compensation expenses of more than 4,000 US public companies.
Current accounting treatment often results in compensation expenses that are 15-25% higher than what would be recorded if illiquidity discounts were applied, according to analyses from major accounting firms. For a company granting $100 million in restricted stock, this could mean a reduction in reported compensation expense of $15 million to $25 million. The consultation will examine whether to incorporate discount factors ranging from 10% to 35%, based on vesting periods and forfeiture risk.
Analysis — what it means for markets / sectors / tickers
The technology sector stands to benefit most significantly from any rule change that reduces reported compensation expenses. Companies like Salesforce.com Inc. (CRM) and Adobe Inc. (ADBE), which heavily utilize restricted stock units, could see material improvements in their GAAP earnings per share. The biotechnology sector, another prolific user of restricted stock for employee compensation, would similarly benefit. Conversely, the change would have minimal impact on sectors like utilities and consumer staples that rely less on equity-based pay.
A potential risk is that reduced expense recognition could lead to increased scrutiny from investor groups focused on executive pay transparency. Some institutional investors may argue that lower reported compensation expenses mask the true economic cost of awarding restricted stock. The flow of comments to FASB is expected to be heavily weighted toward corporate issuers seeking expense reduction, with investor groups advocating for caution in altering transparency standards.
Outlook — what to watch next
The comment period for the proposed accounting changes remains open until 30 October 2026. FASB will then review submissions and potentially issue an Exposure Draft in Q1 2027. Key levels to watch include the proposed discount ranges that emerge from the consultation, which will signal the potential magnitude of earnings impact for affected companies.
Final rule adoption would require a majority vote of the seven FASB board members. The implementation timeline would likely include a transition period, with new rules becoming effective for fiscal years beginning after 15 December 2027. Market participants should monitor statements from the Big Four accounting firms and major proxy advisory firms like Institutional Shareholder Services for their stance on the proposed changes.
Frequently Asked Questions
What is restricted stock in accounting?
Restricted stock refers to shares of company stock granted to employees that are subject to a vesting schedule. Under current US GAAP rules, companies must recognize compensation expense based on the stock's fair market value at the grant date. This expense is amortized over the vesting period, typically three to four years, reducing reported earnings.
How does this FASB proposal affect company earnings?
The proposal could lower reported compensation expenses by allowing companies to apply a discount to restricted stock valuations to account for illiquidity and vesting restrictions. This would directly increase GAAP net income and earnings per share for companies that make significant use of restricted stock awards in their compensation programs.
What is the difference between restricted stock and stock options?
Restricted stock provides actual shares subject to vesting, while stock options give the right to purchase shares at a set price. Restricted stock has value even if the share price declines, whereas options can become worthless. Accounting treatment differs, with options requiring complex valuation models like Black-Scholes, while restricted stock is typically valued at the market price on the grant date.
Bottom Line
FASB's review could materially reduce reported compensation expenses for technology and growth companies.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
