Four Fundamentals of Financial Reporting for Equity Compensation

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1

Four Fundamentals of Financial Reporting for Equity CompensationKathy Biddle, CEP

September 2014


2Best Practices

Make accounting treatment a part of the plan design

Build in process efficienciesWell structured internal controlsPrepare your team


3Reporting Burden

Regulatory requirements Accounting rules Subjective assessments Short timeframes


4Successful Plan Design

Involve Accountants in design phase• Agree on interpretations BEFORE

implementation• Determine financial and tax accounting

implications – not just the compensation cost

• Create and run scenarios• Test impact of various conditions and

outcomes


5Accounting Treatment – Part of Plan Design

Restricted or Option based? Settled in stock or cash? Time only, performance only, or

combination of time and performance? Measurement date and service period? Performance Metrics – Financial

performance, strategic milestones, stock-price performance• Performance or Market-based valuation?


6Build in Process Efficiencies

Quarter-End and Year-End Challenge More information in even shorter

timeframes Race to file the 10Q Process must be

• Structured, defensible, efficient and repeatable


7Automation vs. Manual Process

Spreadsheet• Time consuming to update• Higher error rate• ISO 100K calculation errors• Missed data elements

Available automation choices


8Outsource the Process/Calculations

Advantages• Saves time internally• Expertise of resource contracted

Disadvantages• May be difficult to predict future cost• Sustainability • Increased vendor risk assessment

requirements


9Build a Custom Software Solution

Advantages• Addresses specialized business needs• Innovation may result in competitive

advantage

Disadvantages• Significantly higher initial cost• Necessitates working with development

team• On-going maintenance costs


10Software Installed On-Site

Advantages• Sometimes lower initial cost

• Vendor risk is limited to the functionality –

hosting is your own environment

Disadvantages• May be difficult to predict future cost

• Transition to new version is burden for stock admin team and IT


11Software as a Service

Advantages• Less demand from IT• More accessible for mobile or remote users

Disadvantages• Less control over software version• Increased vendor risk assessment

requirements• May increase data privacy requirements


12Well Structured Controls

IT/Technology Issues• Capture data accurately, ensure appropriate

segregation of duties

• Be sure controls for post dated transactions

are adequate

• Data Security

Grants• Ensure the terms of the award are correct

and that it meets plan requirements



Vesting/Exercise• Verify that the participants are eligible

• Ensure that shares are released accurately and promptly to participants or broker

Tax and Payroll• Determine the proper FMV for all

transactions• Ensure the correct amounts were

calculated for income and tax withholding• Confirm that IRS reporting and payment

requirements have been met



Accounting• Verify calculations and reports for

accuracy, completeness and validity• Ensure well documented procedures are in

place

Legal• Confirm that underlying shares are

properly registered• File SEC Forms 3, 4 and 5 timely when

required• Design and control your blackout periods



Application of Forfeiture Rates• Establish policy for application of forfeiture

rate• Static vs. Dynamic forfeiture

• Review current forfeiture rate and adjust over the service period

• Establish policy to handle back dated transactions


16Accounting Hazards

Excess withholding• Allowing participants to choose withholding

rates can trigger liability accounting for awards

• ASC 718-10-25-18 and 718-10-25-19• Set the standard for all situations and don’t

waiver under pressure


17Accounting Hazards

Employee vs. Non- Employee• NE - Mark to Market revaluing• EE – Fixed Accounting

Performance Awards• Performance vs. Market based• Managing expectations

Retirement Eligibility


18Modifications

Consult with Accounting for certain events• Determine treatment before data is changed

Events that generally trigger modification accounting• Option Exchanges• Equity restructuring• Acquisitions• Other changes to original terms:

• extension of exercise grace period• acceleration of vesting• allowing employee to retain options post

termination


19Modifications

Events that generally do not trigger modification accounting• Stock Split/Spinoff/Equity restructuring with

an anti-dilution provision in plan

• Acceleration of vesting unrelated to

termination

• Additional features such as permissible

exercise methods or name changes


20Questions

Kathy Biddle, CEP, ECUFinancial Reporting Specialist

[email protected]

Office (925) 730-4329

Equity Administration Solutions, Inc.

Thank you for

your time today

mailto:[email protected]

Documents

Four Fundamentals of Financial Reporting for Equity Compensation