© 2014 Equity Administration Solutions, Inc. All rights reserved. 1 Four Fundamentals of Financial Reporting for Equity Compensation Kathy Biddle, CEP September 2014
Jan 01, 2016
© 2014 Equity Administration Solutions, Inc. All rights reserved.
1
Four Fundamentals of Financial Reporting for Equity CompensationKathy Biddle, CEP
September 2014
© 2014 Equity Administration Solutions, Inc. All rights reserved.
2Best Practices
Make accounting treatment a part of the plan design
Build in process efficienciesWell structured internal controlsPrepare your team
© 2014 Equity Administration Solutions, Inc. All rights reserved.
3Reporting Burden
Regulatory requirements Accounting rules Subjective assessments Short timeframes
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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?
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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
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7Automation vs. Manual Process
Spreadsheet• Time consuming to update• Higher error rate• ISO 100K calculation errors• Missed data elements
Available automation choices
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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
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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
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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
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13Well Structured Controls
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
© 2014 Equity Administration Solutions, Inc. All rights reserved.
14Well Structured Controls
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
© 2014 Equity Administration Solutions, Inc. All rights reserved.
15Well Structured Controls
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
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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
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17Accounting Hazards
Employee vs. Non- Employee• NE - Mark to Market revaluing• EE – Fixed Accounting
Performance Awards• Performance vs. Market based• Managing expectations
Retirement Eligibility
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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
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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
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20Questions
Kathy Biddle, CEP, ECUFinancial Reporting Specialist
Office (925) 730-4329
Equity Administration Solutions, Inc.
Thank you for
your time today