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December 18, 2009
Volume 2, No.12

In this Issue:

The Holiday Spirit

In Memoriam: Charles Hall

Webinar on January 27th: Revised IRS Regulations for Section 6039 and Section 423

SOS Focus: Fun with Forfeiture Rates under FAS 123(R)!

Product Spotlight: SOS Customized Stock Plan Software Reports

ShareComp 2010

SOS Across Our Desk

SOS Xposé

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The Holiday Spirit

Children are my favorite part about the Holidays; they remind us of everything pure, simple and joyous. This past week has been especially inspiring for me because my 6- and 8-year-old daughters came home from school with the idea to raise money to donate to the Ronald McDonald House at Stanford. The simplicity or their thoughts and actions moved me and reminded me about the joy of giving.

This year we have all struggled to learn to do more with less, and with our economic expectations reset, many of us have realized that we achieve happiness not through things, but through our experiences and giving more of ourselves. This season and in the New Year, I urge you to find a place in your heart and resolve to help a charity this coming year. As for Sydney and Shelby (my daughters) they have decided to earn money through chores and purchase toys for the children at the Ronald McDonald House. Usually, it is the adults that set the example for the children, but I am blessed this year to see how my kids are setting the example for the world!

Listed below are a few national charities; but I urge you to find the charity that inspires and binds you to the cause. In addition, you may want to research your local community and see how you can volunteer in a local food pantry, senior center, toy drive, or other important cause. The giving of your compassion and friendship will reward you immensely and ignite the true Holiday Spirit in your heart.

Barrett Scott, Principal
Stock & Option Solutions

2nd Harvest Food Bank (now called Feeding America):

US Marine Corp Toys for Tots:

Ronald McDonald House:

Ronald McDonald House at Stanford:

Habitat for Humanity:

Send a letter or a package to our troops:;

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In Memoriam: Charles Hall

We are very sad to report that Charles Hall, of AFLAC Inc., a long-time and well-respected member of our stock plan community, passed away on Friday, December 4th. I, personally, had known Charles since perhaps my very first ShareData Conference in 1999. Charles was not only an intelligent man and astute observer, but was also just one of the nicest people I've ever met. Each year at the industry conferences we both attended, he would seek me out with a new fuzzy AFLAC duck in hand as a gift for my children. One year, after AFLAC early adopted FAS 123(R) and the systems weren't much help yet, I did my best to assist him in culling together the numbers for the required year-end disclosures. Charles responded by sending me a gift, a limited edition jumbo-sized ALFAC duck - the kind with reindeer antlers. He didn't have to go out of his way to say thank you or be kind; that was just the kind of guy he was. He was always smiling, always on top of things. Good at his job, thoughtful, fun-loving, and full of life. Charles, you will be missed by all of us who knew you.

Elizabeth Dodge

Free Webcast:
Revised IRS Regulations for Section 6039 and Section 423: You've Got Questions, We've Got Answers

January 27th, 2010

Click here to register.

Please join us for our next free webinar on Wednesday, January 27th at 11am Pacific Time, 2pm Eastern Time

The revised regulations for IRC Sections 423 and 6039 have been finalized - do you understand their impact on your plans and practices? What steps do you need to take? If you have a 423-qualified ESPP or you grant ISOs, you won't want to miss this critical, timely session!

Have the requirements for Section 6039 statements changed for this year-end? Is the IRS requiring the new 3921 and 3922 forms to participants in January of 2010? Are substitute forms allowed? The transaction triggering the reporting of ESPP has changed - how does this impact your processes? Do you have to send statements to participants exempt from US taxation? Which changes will be required for next year?

What about submitting data to the IRS? How will the process work and how will you get the data out of your system and to the IRS?

What about the "clarifications" that were proposed to the $25,000 ESPP limit that no longer let you "carryforward" unused portions of the limit from previous years? If you have a look-back feature, what steps must you take to ensure that your enrollment date is still the purchase date?

What about foreign employees and employees under 18? Will you be able to exclude them from 423-qualified ESPP plans?

Join our expert panelists as they discuss these issues and other hot topics stemming from the final IRS regulations on Section 6039 and Section 423.


(One hour of Certified Equity Professional continuing education credit is available for attending. See the CEPI website for more information on CEP continuing education requirements.)

SOS Focus: Fun with Forfeiture Rates under FAS 123(R)!

The more we work with firms across the country reviewing, assisting with audit, answering software questions or just generally explaining FAS 123(R), the more it becomes apparent how few people actually understand the application of forfeiture rates under the standard. So we thought we'd take a few minutes and try to explain the basics and a few of the different methods that are often used.

Please note that to be technically accurate under the codification of the FASB accounting standards, we should be referring to ASC 718 instead of FAS 123(R). However, since common practice is, at the moment, to refer to the "old names" of the standards, we'll stick with that for the purposes of this article.

FAS 123(R) requires that the accrual of expense be recognized (i.e. amortized) over the service period of the grant, which is generally the vesting period for time-based grants. However, since it is likely that not all grants will ultimately vest and since expense is reversed for forfeited grants, the standard requires that you reduce the accrual by an estimated forfeiture rate.

Consider a simple example: If you had five grants, each valued at $100, vesting over a year, and you had an estimated forfeiture rate of 20%, you would accrue only $400 instead of the full $500 of expense. However, you must true up for actual forfeitures, so if all the grants vested, you would true up to $500. If two of the grants were forfeited instead of one, you would ultimately recognize only $300 of expense. The goal of applying estimated forfeiture rates is to "smooth out" expense and attempt to minimize the "peaks and valleys" of the expense recognition that we encountered under FAS 123 - when most companies recognized forfeitures as they occurred (as they were permitted to under that standard).

Annualized Forfeiture Rate vs. Flat Rates
Often an annualized forfeiture rate is used, therefore the rate is applied "to the power of" the service period of the grant. An annualized rate is the likelihood that a grant will be forfeited within any one year. If your annual forfeiture rate is 5%, but the entire grant vests in 3 years, each year the likelihood that the full grant will be forfeited is 5%. Therefore you apply the rate like this: (1-.05)3, giving you .95*.95*.95 or an "expected to vest" rate of about 86%. Therefore if you had $100 of fair value, you would accrue only $86 of expense over the three-year service period (until it ultimately vested or was forfeited, which would require a true up).

A few systems/practitioners use a "flat rate" instead, calculating the likelihood that the grant will forfeit over the entire service period and applying that to the accrual of expense. So at grant you'd determine that the forfeiture rate for the three-year service period is 15% and you'd accrue just 85% of the expense over that period. The benefit of this approach is that it's slightly simpler to understand and audit. The downside is that you must determine, at the time of grant, for each grant with a different service period, a different forfeiture rate. You need one forfeiture rate for a grant with a three-year cliff vest service period and a different rate for a grant with a four-year cliff vest service period. So your system must store and use a different forfeiture rate at the grant level.

Static vs. Dynamic Application of Forfeiture Rates
This is one of the trickier areas of forfeiture rates, so bear with me...The examples of how to apply the forfeiture rate in FAS 123(R) discuss a group of grants and the total expense for the grants. They apply the forfeiture rate (to the power of the three-year service period) to the total expense throughout the life of the grant and if the forfeiture rate proves inaccurate during the year, the rate is adjusted (see Illustration 4(a) - paragraphs A86 through A92). In the examples, the forfeiture rate is applied using the three-year service period throughout the three-year life of the grant. Adjustments are made to the forfeiture rate throughout the vest period, but any necessary true up for actual forfeitures is not performed until the vest date for the grants is reached, at which point the final count of grants forfeited and vested is known.

Why do forfeited grants still appear to be expensed until they vest?
This method, in which the entire service period is used to apply the forfeiture rate during the entire service period is sometime called "the static method" because neither the service period nor the total expense is adjusted. Forfeited grants remain within "the pool of expense" even after they are forfeited. If the forfeited grants were to be removed from the total expense being recognized and the entire service period were used to apply the forfeiture rate, the forfeitures would be "double-counted" and the appropriate amount of expense would not be recognized until true up.

Let's consider our simple example from above: five grants, valued at $100 each, with a one-year service period. The total pool of expense is $500, reduced by an annualized forfeiture rate of 20%. Therefore only $20 is accrued each quarter for each grant instead of the full $25 for each grant. If one of the grants is forfeited in the second quarter of the year, the full $500 is still used as the base amount of expense before the forfeiture rate is applied.

If the expense for the forfeited grant were removed from the total expense before the forfeiture rate were applied, leaving a total expense of $400, since the full service period is still used to apply the forfeiture rate, the accrual each quarter would be only $80 (($400 *.25) * (1-.20)1). This would result in an under-accrual of expense over the one-year service period. If the 20% estimated forfeiture rate is accurate, at the end of the year, the expense must be trued up to $400 since 4 of the 5 grants vested. So the expense per quarter would be:

Table 1
This approach results in a rather "lumpy" accrual of expense.

Now, if you leave the forfeited grant on the report, but continue applying the forfeiture rate with the full service period, the expense would be: Table 2
Because the forfeiture rate is perfectly accurate, the accrual of expense is perfectly even over the service period.

The biggest problem with this approach is that it is nearly impossible to accurately predict forfeiture rates. With the static method all the true up is left until the end, so if your forfeiture rate is inaccurate (and whose isn't?) and you haven't been making adjustments to the rate as you go (and few do) the true up hits all at once, in the quarter in which the grants vest.

The Dynamic Method
The alternative approach to the static method was proposed some time after the final standard was released. This approach is sometimes called "the dynamic method" - so called because the grants comprising the "pool of expense" change (forfeited grants are removed) and the forfeiture rate is adjusted throughout the service period: only the remaining service period is used to apply the expense. In our example above, if the grant were granted at the beginning of the first quarter, in the first quarter the forfeiture rate would be applied "to the power of" .75, because only 3/4 of a year remains in the life of the grant. In the second quarter, .50 would be used, etc.
Table 3
Though the expense is less even over time, the adjustments to the forfeiture rate are "automatic" - as the grant gets closer to vesting, it is more likely to vest, so more expense is accrued for it. Final true ups are still required for the grants that vest, but they are likely to be slightly less dramatic than under the static approach, depending on the magnitude of inaccuracy of the forfeiture rate.

The application of forfeiture rates under FAS 123(R) continues to be one of the stickier areas of application within the standard. And, unfortunately, IFRS 2 has the same requirement. And though both the static and dynamic methods are considered "correct" by practitioners and audit firms, at least two audit firms have suggested that the dynamic approach is preferred. Though ultimately the same amount of expense will be recognized for your equity compensation grants, understanding and fine tuning your forfeiture rate approach can result in a better result for your company and fewer surprises on your income statement.

Questions on this article or forfeiture rates in general? Questions about using a "weighted-average rate" to apply the forfeiture rates? Curious about how to switch from a static to a dynamic approach? Email us. We love to talk forfeiture rates!

Product Spotlight: SOS Customized Stock Plan Software Reports

Stop the spreadsheet madness! Eliminate manual data manipulation, save time, reduce risk!

Are you still wasting time and money formatting data, moving columns, and adding complicated formulas to spreadsheets after exporting data from your stock plan software or system?

Custom reports from SOS can be tailored to your specifications to improve formatting, reorganize data, or ease data movement from system to system so you can meet your reporting needs with a few clicks instead of hours of work each week, month, or quarter.

SOS Custom Report Features:
  • Reports customizable to your specifications
  • Can be written in Crystal reports for in-house software applications or MS Access if stock plan management is outsourced
  • Uses data from your existing stock plan platform (data can be supplemented with external data, if needed)
  • Installs as part of your software or as an application on your desktop or network
  • Improves the format of exported reports to eliminate merged cells or extra cells
  • Add, remove, or reorder data columns

Examples of Custom Report Applications:
  • Audit the Deferred Tax Asset booked for outstanding, fully vested grants
  • Customize grant agreements and other participant communications
  • Combine multiple reports into one
  • Add your company logo to reports
  • Reformat exports to match payroll required formats
    • Change exercise/release export data from one row per tax to one column per tax
    • Add, remove, and/or reorder columns
  • Liability accounting
  • Modification accounting (option exchanges, mergers, etc.) - tax accounting, accrual, diluted EPS calculations
  • Calculate current Black-Scholes fair values for outstanding grants
  • Forecast expense, quarter-by-quarter, for multiple years on a single report
SOS Custom Report Benefits:
  • Save Time: countless hours manipulating data in a spreadsheet
  • Reduce Risk: eliminate the danger of manual data manipulation and error

For more information, please feel free to contact us at

ShareComp 2010

SOS is a proud sponsor of equity compensation industry's first virtual conference

Mark Clem, Melanie Jameson, Dan Walter, and Marlene Zobayan have launched a new venture, Virtual Conference Partners LLC. (Dan and Melanie continue their work with Performensation; Marlene continues with Rutlen & Associates). VCP will produce trade shows, professional conferences, shareholder meetings, and other traditionally physical events, in a virtual environment. Their first event for stock plan professionals, ShareComp 2010, will be held on February 23, 2010.

As a founding sponsor, we are able to offer you a free registration. Register now using our sponsor pass "SOS" to secure your free attendance at this exciting, market-leading event and feel free to share this sponsor pass with others within your company. (And CEP credit will be available!)

Register Here

SOS Across Our Desk: Equity Compensation in the News...

No clear answers on its adoption, but there is some advice from those who've been there...

Sarbanes Oxley
The Sar-banes of Their Existence...small business, that is...and an upcoming Supreme Court ruling could make things interesting.

Option Backdating
Judge tosses charges in Broadcom backdating case...

Linking Pay to Performance
Why Goldman-Sachs should manage like Apple (and Humana, and Nucor...) BTW, are your performance awards ready for 2010???

New Regulations
Plenty of articles on 6039 and 423 Regulations here, here, here, and here...

Want to get these updates as we find them? Follow us on Twitter or become a fan on Facebook.

Read the latest SOS Press Release (which includes a video Q&A): "Stock & Option Solutions Launches a New Kind of Stock Plan Management Outsourcing Solution"

SOS Xposé

...tender tidbits about people and players in our industry...

Congrats!... SOS' own Justin Docter and his wife Elizabeth welcomed their first child Elizabeth (Elli) into the world on December 4th. Elli weighed 6lbs, 13 ounces, has her mother's strawberry blonde hair, and likes to keep her dad up at night talking... Congratulations to SOS' Elizabeth Dodge on her election to the Silicon Valley NASPP chapter board, and her selection to the distinguished group of CEP Volunteer Excellence Award winners...Jennifer Baehr of Transcentive is expecting a new addition to her family on March 27th. She also has a son who just turned 2... Ralph Balzano, Relationship Manager with BNY Mellon Shareowner Services, has a new baby boy, Michael Ralph. Michael was born on November 30th, and weighed 8lbs, 7oz...Darren Nieman (Curtis Consulting Group) and his wife Allison, are expecting their first child, a girl, on March 2nd, 2010. We wish them all the best.

On the Move!... Peter Yeav has moved up the Peninsula to Franklin Templeton Investments from his long-time home at Sun Microsystems. Peter has SOS roots, and we wish him all the best in his new surroundings... In November, David Thomas was elected to become a partner in the Employee Benefits and Compensation Group of Wilson Sonsini Goodrich & Rosati to be effective February 1, 2010...If you've met Darrin Short of Equinix you've probably heard him complain about the foggy weather in Pacifica (it seemed like the same ocean as in San Diego, but not really...) Well, as of late December 2009, you can find him in San Francisco, where he is planning on throwing equity comp shindigs for years to come...John Hammond has made the move from "strategy guy" to "sales guy" as a Vice President of Sales for Computershare-Transcentive's Integrated Solutions Group... Ellie Kehmeier will be hanging up her Deloitte hat after 27 years with the firm. She still plans to consult on the tax aspects of equity compensation, and can be reached at Best of luck to you, Ellie...

Players... Frontera has announced the release of their automated international tax calculation, reporting, and workflow solution. You can read more about it here...Schwab has announced the integration of IFRS reporting capabilities, including valuation, expense, and disclosure, into their Schwab Equiview® web-based record-keeping system.

SOS wishes you the happiest of holidays, and hopes all your options are good ones in 2010!
Information provided in this newsletter is designed for educational and entertainment purposes only and is not provided as professional service or advice. Moreover, this newsletter should not be relied on as legal, accounting, auditing, or tax advice. Anyone reading this newsletter should not act upon this information without seeking professional counsel and/or input from their advisors. The preceding information does not necessarily represent the official views of Stock & Option Solutions, Inc. with respect to any of the issues addressed.
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