Best Practices in ASC 718 Forfeiture Rate Estimation

Many companies apply a single forfeiture rate to all the grants within their ASC 718 amortization model. However, much like the requirement in estimating the expected term assumption, ASC 718 requires testing for the possibility that different groups of employees exhibit distinct forfeiture patterns.

Although differences in exercise behavior are not frequent, this Issue Brief summarizes a recent Equity Methods study of forfeiture patterns in a sample of 38 companies. The results document considerable differences between executive and non-executive forfeiture patterns, thus posing important implications for how companies estimate and apply a forfeiture rate as part of their ASC 718 compliance process.

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