Financial Reporting
Can Your 409A Carry Your ASC 718 Expense? The ASU 2021-07 Checklist
A 409A can supply the ASC 718 price input under ASU 2021-07, but only if it meets set conditions. A checklist for the finance lead preparing a first audit.
By 409.AI Team - 2026-10-06
# Can Your 409A Carry Your ASC 718 Expense? The ASU 2021-07 Checklist
Ask a startup finance lead before a first audit what the 409A is for, and the usual answer is "the IRS." The auditors, they assume, will want a separate fair value for stock compensation expense. Sometimes that's true. Often it isn't, because FASB wrote a practical expedient in 2021 that lets one valuation do both jobs, provided the report meets a specific list of conditions.
This post is for the finance lead or controller preparing the first ASC 718 expense for audited statements. We'll turn the expedient into a checklist you can apply to every 409A report you receive, because it's also the one test most provider comparisons never run.
What the expedient actually says
ASC 718 measures a stock option's fair value with a pricing model, and the biggest input is the current price of the underlying share. For a private company that price has to come from somewhere. [ASU 2021-07](https://storage.fasb.org/ASU_2021-07.pdf) allows a nonpublic entity to determine that input through "the reasonable application of a reasonable valuation method." It describes what that means using the same characteristics as the Treasury regulations under Section 409A, and says plainly that a valuation performed in accordance with those regulations is an example of a way to meet it.
Two things follow. A 409A report can serve as the price input for your ASC 718 expense, and a 409A report that falls short of the characteristics can't. The expedient doesn't bless every valuation that carries the 409A label. It blesses the ones that meet the conditions below.
If you want the broader picture of how the expense gets built, start with our [guide to ASC 718 for startups](https://www.409.ai/articles/asc-718-stock-based-compensation-startup-guide). The rest of this post is the part that guide only summarizes.
The checklist
1. Is the award equity-classified?
The expedient is available only for equity-classified awards. Stock options, restricted stock and RSUs that settle in shares normally qualify. Awards that can require a cash payout don't. FASB's reasoning was that liability-classified awards affect the entity's cash on settlement, and that they're remeasured at every reporting date, which nobody expects a company to pair with a full Treasury-regulation valuation each quarter. A [phantom stock or SAR plan](https://www.409.ai/articles/phantom-stock-sars-private-company-409a-asc-718) is the typical case where the 409A can't simply be reused.
Sort the awards first. Everything below applies only to the ones that pass.
2. Was the valuation evaluated as of the measurement date?
The expedient evaluates the valuation's reasonableness on the measurement date, which for most option grants is the grant date. A report dated on the grant date is the cleanest case. A report dated earlier can still work, but only if it clears items 4 and 5.
3. Does the report consider the six factors?
The ASU lists what a reasonable valuation should consider:
- the value of the entity's tangible and intangible assets;
- the present value of anticipated future cash flows;
- the market value of stock or equity interests in similar businesses;
- recent arm's-length transactions in the entity's own stock;
- other relevant factors, such as control premiums or discounts for lack of marketability, and whether the valuation is used for other purposes that materially affect the entity, its stockholders or its creditors;
- the entity's consistent use of a valuation method for other purposes.
Open the report and find each one. Most reports show the income and market approaches and the discount for lack of marketability without trouble. The factor that goes missing is the recent transaction one. A report that never mentions the last priced round, a secondary sale or a convertible note conversion hasn't considered recent arm's-length transactions, however polished it looks. A backsolve to the latest round is the usual way a report brings that transaction in, and we explain it in [how a 409A allocates value across the capital structure](https://www.409.ai/articles/409a-allocation-methods-opm-pwerm-backsolve).
4. Did it consider all information material to value?
The scope is "all information material to the value of the entity." That's broader than the six factors. A signed term sheet, a lost anchor customer or a pending acquisition offer all count if they bear on value. Ask your provider what management told them, and check the report's list of items relied on. If the data request ended in March and the report is dated April, anything that happened in between is your responsibility to flag.
5. Is it no more than 12 months old, and updated for what happened since?
Reusing an earlier value is allowed only if two things hold. The value must be updated for any information available after the calculation date that may materially affect the value of the entity. And it must have been calculated no more than 12 months before the date you're using it for.
Here's how that plays out. Say your valuation is as of March 31, 2026. A grant on April 20, 2026 is fine. A grant on November 10, 2026 is inside 12 months, but if you signed a Series B term sheet on October 15, the March number hasn't been updated for something that plainly moves value, and the expedient is off the table for that grant. A grant on April 15, 2027 fails on age alone, event or no event. The same discipline drives the tax side, which we cover in [when to update your 409A](https://www.409.ai/articles/409a-valuation-frequency-how-often-should-you-get-one). The accounting test and the tax test point the same way, so one calendar can serve both.
6. Did you elect it, measurement date by measurement date?
The expedient is an election, made for each measurement date. When you apply it, you apply it to all in-scope awards that share the same underlying stock and the same measurement date. So you can't apply it to the engineers' January grant and skip it for a consultant's grant on the same shares that day. FASB considered a single policy for all awards, which would be tidier, and decided it would be illogical to bar a company from using a valuation method that already complies with ASC 718.
7. Is the election disclosed?
A nonpublic entity that elects the expedient has to disclose that election in its share-based payment disclosures. It's a single line and easy to forget. Put it on the close checklist next to the expected term and volatility assumptions.
Where the reasoning gets practical
An independent appraisal is the path of least resistance. FASB said so directly: it expects independent appraisals to be used often, because of the presumption of reasonableness the Treasury regulations attach to them, and because the other methods that earn that presumption are narrow. An internal valuation could meet the characteristics, but you'd be defending it on the merits rather than leaning on a presumption. That's the same logic we describe in [what earns the safe harbor](https://www.409.ai/articles/409a-safe-harbor-price-vs-qualified-appraiser), where the qualifications of the person behind the report matter more than what it cost.
If you do rely on the expedient, the auditor's work doesn't vanish. Your auditor will test the assumptions behind the report, which is what [a first audit tests about your 409A](https://www.409.ai/articles/first-audit-409a-valuation-au-c-540-assumptions). Separately, check independence early. Under [the auditor independence rule](https://www.409.ai/articles/auditor-independence-409a-valuation-provider-rule), your audit firm usually can't produce the valuation it will then audit.
Using the checklist when you pick a provider
Provider comparisons tend to rank on price, turnaround and sign-off. Those matter, but none of them tells you whether the report you receive will carry your ASC 718 input. Ask four questions before you order:
1. Will the report consider all six factors and say so, including recent transactions in our stock? 2. Will it be dated close to our measurement dates, and will the provider update it for material events on request? 3. Do you issue updates within the 12-month window quickly, so we aren't pricing grants on a stale number? 4. Does the report's description of method and inputs give our auditor what it needs to test it?
If the answers are yes, the report can do double duty. [409.AI's 409A valuation](https://www.409.ai/products/409a) is one place to start, and where an award is liability-classified or the report can't be used, our [ASC 718 valuation](https://www.409.ai/products/asc-718) covers the fair value separately.
What to do this quarter
Pull your last 409A report and walk the seven items against it. Sort your awards by classification. List every grant date since the report's date and mark any material event in between: a priced round, a term sheet, an acquisition approach. For each grant date, write one sentence in the equity file saying whether the expedient applies and why. Then add the disclosure line to your notes template before the auditors ask for it.