Stock Awards After an Employee Leaves: What FASB’s Proposal Could Mean for Businesses
When an employee leaves a company, their final paycheck may not be the only financial matter that needs attention.
For businesses that offer stock options, restricted stock units (RSUs), or other forms of equity compensation, an employee departure can create important accounting questions, especially when the company changes the terms of an award that has not yet vested.
The Financial Accounting Standards Board (FASB) recently proposed changes intended to clarify how these situations should be handled under U.S. GAAP.
What Is FASB Proposing?
The proposal focuses on share-based awards that are modified after an employee or other recipient stops providing services to a company.
Under the proposed guidance, a modified award that has not yet vested would generally continue to be accounted for under ASC Topic 718, Compensation - Stock Compensation, even after the recipient leaves the company.
This is intended to address uncertainty in the existing guidance over when an award stops being subject to stock compensation accounting and moves into other accounting guidance.
Why Does This Matter?
Employee departures do not always mean equity arrangements immediately end.
For example, a company may decide to:
Allow unvested shares to continue vesting
Extend the period for exercising stock options
Accelerate the vesting of an award
Modify performance conditions
Negotiate equity terms as part of a severance or executive departure agreement
These arrangements can create accounting questions about how the modified award should be measured and reported.
FASB's proposal is intended to provide greater consistency by clarifying that an unvested award generally remains within Topic 718 even when the employment or service relationship has ended.
Who Could Be Affected?
The proposal is not limited to traditional employees.
Businesses may need to pay attention if they issue share-based compensation to:
Employees
Independent contractors
Vendors or service providers
Other nonemployees receiving equity as part of a business arrangement
Companies that frequently use equity compensation, particularly startups, technology companies, growing private businesses, and organizations with executive stock plans, may want to review the proposal closely.
Employee Departures Could Require More Accounting Attention
Consider a company that grants an employee stock options that vest over several years.
The employee leaves before all of the options have vested. As part of the employee's departure agreement, the company allows some of those awards to continue vesting or gives the employee additional time to exercise them.
The accounting question becomes: Does the award remain subject to stock compensation accounting after the employee leaves?
FASB's proposal would generally make the answer clearer. If the award is still unvested and is modified, it would remain within Topic 718 despite the employee's departure.
An exception would generally apply when the award is already fully vested and the individual is no longer an employee or service provider.
What Should Businesses Do Now?
The proposed accounting changes are not final, so businesses do not need to immediately change their accounting policies based solely on the proposal.
However, companies that regularly issue or modify stock-based compensation should consider reviewing their existing arrangements.
Businesses may want to:
Review equity compensation plans. Identify awards that may continue after an employee or contractor leaves.
Examine departure and severance agreements. Determine whether stock options, RSUs, or other awards are commonly modified when individuals leave.
Review current accounting practices. Understand how modified awards are currently being classified and reported.
Coordinate with accounting and tax professionals. Equity compensation can create accounting, tax, payroll, and reporting considerations.
Monitor the final FASB guidance. The requirements could change before the proposal becomes final.
When Could the New Rules Take Effect?
For now, there is no final effective date.
FASB is accepting comments on the proposal through November 19, 2026, and will consider feedback before deciding whether to issue final guidance.
That means businesses still have time to understand how the proposed changes could affect their accounting practices.
The Bottom Line
Equity compensation does not necessarily become an accounting nonissue when an employee walks out the door.
Companies that modify stock options, RSUs, or other share-based awards following an employee or service provider's departure may need to continue accounting for those awards under Topic 718 if FASB's proposal is finalized.
For businesses with equity compensation programs, now is a good time to review existing plans, departure agreements, and accounting procedures.
Need help understanding how accounting changes could affect your business? The Virtual CPAs can help you stay informed, organized, and prepared.
This content is provided for general informational purposes only and should not be considered individualized accounting, tax, legal, or financial advice.