What it means
Share-based pay is a promise made now and delivered later, so the accounting rules need a fixed point at which to measure that promise. The grant date is that point, defined as the date on which the company and the recipient reach a shared understanding of the terms and conditions of the award.
That definition is stricter than it sounds. If the award needs board or shareholder approval, or if key terms such as the number of shares are still uncertain, the grant date is pushed back until those matters are settled, even if the employee has already been told about the award informally.
Its main practical consequence is the accounting charge. The fair value of the award is measured once, at the grant date, and that figure is then spread as an expense across the vesting period, regardless of what happens to the share price afterwards.
This is why a company can report a large share-based payment expense on options that end up worthless. The charge reflects what the options were worth on the day they were granted, not what they turned out to be worth, and for equity-settled awards it is generally not revisited.
The grant date also matters for tax and governance. Exercise prices are usually set at the share price on that date, vesting clocks start from it, and boards are careful about granting awards shortly before good news becomes public, a practice that attracts regulatory attention.
In practice
Real-world examples.
Example
A listed retailer approves its annual long-term incentive plan at a board meeting on 12 April. That is the grant date for 140 executives, and the fair value calculated on that day drives the expense reported over the following three years.
Example
A private software firm offers a new hire options in her offer letter in January but the board only ratifies the number of shares in March. The auditors conclude that the grant date is March, because the terms were not agreed until then.
Example
A manufacturer restructures an underwater option scheme by cancelling old awards and issuing replacements. The replacement awards carry a new grant date, and the accounting treats the modification as a continuation with any incremental fair value added to the remaining charge.
Think of it
“Grant date is when you receive the award-when the option or stock is granted.
Formula
Calculation
Total share-based payment expense = Number of awards expected to vest x Grant-date fair value per award. Annual charge = Total expense / Vesting period in years
A technology company grants a senior engineer 20,000 share options on 1 March, when the shares trade at $18. The exercise price is set at $18, and an option pricing model gives a grant-date fair value of $6.40 per option. The total expense is 20,000 x $6.40 = $128,000. The options vest evenly over four years, so the annual charge is $128,000 / 4 = $32,000, taken to the income statement each year with a matching credit to equity. If the share price falls to $9 and the options are never exercised, the company still records the full $128,000 over the four years, because equity-settled awards are not remeasured for share price movements after the grant date.Case study
Seen in the real world.
Brackenfield Analytics is an illustrative, fictional data business preparing for its first audited accounts after a funding round. Management has been telling recruits since the previous summer that they will receive options, quoting an exercise price based on the old, lower valuation.
The auditors ask a simple question: when did the company and each employee agree the terms? Because the board only formally approved the option numbers and exercise price after the funding round closed, at a much higher share price, the grant date falls after the round. The grant-date fair value per option is therefore considerably higher than management assumed.
The result in this fictional case is a share-based payment charge of about $1,100,000 in the first year rather than the $300,000 budgeted, which turns a small operating profit into a small operating loss. No cash changes hands, but the finance director spends a difficult evening explaining to the board why an accounting date they had never discussed reshaped the headline result.
Watch out
Common mistakes.
- Treating the date an offer letter is signed as the grant date. If the award still needs board approval or its key terms are undecided, the grant date is later.
- Assuming the expense disappears if the options end up out of the money. For equity-settled awards the grant-date fair value is expensed regardless of the later share price.
- Confusing the grant date with the vesting date or the exercise date. The first measures the award, the second is when the employee earns it, and the third is when they convert it into shares.
Questions
People also ask.
Does the grant date always set the exercise price?
Not always, but it is the usual practice, with the exercise price set at the market price or fair value on that day.
What is backdating?
It is the abusive practice of recording an earlier grant date with a lower share price to make options more valuable, and it is treated as a serious accounting and disclosure failure.
Does the charge change if fewer people stay than expected?
Yes. The number of awards expected to vest is revised for staff leaving, but the fair value per award measured at the grant date is not changed.
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