June 28, 2012
Volume 5, No. 3

In this Issue:

Aspirations 2012

Accounting Answers: Straight-line or "Ratable" Expensing Method - Definitions & Issues

GEO's National Equity Compensation Forum (NECF)

SOS Product Spotlight: Training on Accounting under ASC 718 / Training on Stock Plan Software

SOS Xposé

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From the SOS Xtra Archive:

SOS Product Spotlight: Customized Payroll Reporting

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SOS Stock Plan Participant Portal

From the SOS Webcast Archive -

Hire Education: A Guide to Hiring Stock Plan Professionals

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Aspirations 2012

Aspirations 2012, the SOS all-day equity compensation conference for emerging private companies moving toward an IPO or other liquidity event in the next 1-3 years, is right around the corner. The conference will be held at Santa Clara University on July 25th. Here are the latest updates.

13 days left for Early Bird Discount

Early bird registration for Aspirations 2012 closes on July 11th; sign up now and save $25. Space is limited, and last year's conference sold out, so you can't afford to wait. Click here to register.

Conference Program Set

Having received so many quality presentation proposals, the most difficult part about putting this year's conference together was narrowing down the program schedule to 13 (up from 11 at last year's conference). This year's Aspirations promises to be even more informative, and you'll walk away knowing all you need to know to guide your company's equity plans forward.

Aspirations 2012 will feature speakers from private and recently public companies with keen insight and experience with equity plan/IPO hurdles (Bloom Energy, Demand Media, InfoBlox, Skype, Yelp, Zynga), the subject matter experts who have guided companies through the equity plan transition quagmire (Stock & Option Solutions, Baker & McKenzie LLP, International Law Solutions, PC, Performensation, Perkins Coie LLP, Posternak, Blank & Lund LLP, PricewaterhouseCoopers, LLP, Radford, An Aon Hewitt Company, Rose Ryan, Steele Consulting LLC, Wilson Sonsini Goodrich & Rosati), and the stock plan vendors who provide the backbone you'll need to be successful in your newly public world (AST Equity Plan Solutions, Computershare, EASi, Fidelity Investments, OptionEase, Inc., Corporate Focus, Solium Transcentive).

If you are a stakeholder in the success of your company's stock plans, and are looking for confidence that you can confront and solve the challenges in preparing your equity compensation for an IPO, you can't afford to miss this opportunity to learn from the best.

View the conference schedule

Read our press release announcing the program for Aspirations 2012

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Accounting Answers: Straight-line or "Ratable" Expensing Method - Definitions & Issues

One of the most confusing aspects to recognizing expense for equity compensation stems from two factors:

  1. a popular stock plan software using a term in a "non-standard" way and
  2. companies not understanding the difference between the two accrual methods (and sometimes selecting an inappropriate method)

Many accountants commonly use the term "Ratable" to refer to the "FIN 28" method of recognizing expense for equity awards. That method, also known as "accelerated" or "multiple", recognizes expense for each tranche of each grant starting on the grant date and finishing on the vest date for that tranche. I've started to refer to this approach as "tranche-by-tranche" accrual since FIN 28 was superseded by the FASB codification and all those other terms can be incorrect or misleading.

One popular stock plan software, which shall remain nameless, uses the term "ratable" differently. For companies using a straight-line accrual approach, known as "Single" in the software, they have a choice to run expense reports using a "Straight-line" or "Ratable" method. Very few companies seem to understand how these methods differ and I've encountered many companies that are using a method that is not appropriate for the attributes of their grants.

"Straight-line" is just that, the total expense for the grant is recognized evenly from grant date to the final vest date, with no regard to how many shares are in each tranche or when the vesting commences. Total expense is allocated to each tranche based on the number of days of vesting in that tranche. So if your grant has the first tranche with 50% of the shares vesting over 2 years and the next two tranches, each with 25% of the shares vest over the following 6-month periods, the first tranche would be allocated 66% of the expense, even though it contains only 50% of the shares, since of the three years of vesting, it has two years. This results in even expense over the three year vest period.

Another quirk of this method is that if you have a tranche that vests immediately (or immediately after a previous tranche) it has zero days so is allocated $0 expense.

"Ratable" accrues expense based on the number of shares in the tranche so if you have 50% of the shares in the first 1-year tranche and 33% in the next and 17% in the next, 50% of the expense will be booked over the first year, 33% over the second and 17% over the third.

Each approach has its pros and cons, and if your vesting is even over time, each approach should give you very close to the same numbers.

However, in at least a couple of instances, straight-line will not ensure that you are compliant with the requirements of ASC Topic 718:

  1. If your vest base date occurs before your grant date.
    This is a common practice for some new hire grants. Vesting commences on the hire date, but the grant date occurs some time later when the grant is approved by the board. In this case the full expense for the first tranche should be recognized from the grant date to the vest date for that tranche - generally a shorter period than the subsequent tranches. Because the straight-line method does not use individual vest dates for its calculation, the expense will generally not be recognized in full by the vest date (which is a requirement of ASC 718). This is often an immaterial difference, but if your grant date is long after your vest base date, the numbers can add up.
  2. If your vesting is front-loaded.
    This is less common, but still occurs in some cases. As stated above, ASC 718 requires that all expense for a vest tranche must be recognized by the time the shares are vested. If more of the grant vests earlier in the life of the grant, but the recognition of expense is spread evenly over time, the requirements of the standard have not been met.

Some practitioners also argue that Ratable is not appropriate if vesting is uneven over time since the standard offers the choice of only two methods for recognition: a) straight-line and b) graded (tranche-by-tranche). But the standard also attempts to have even recognition of expense over the vest period, so using straight-line accrual and kicking expense up at the vest date also seems to make little sense. Maybe we should all just grant awards that vest perfectly evenly over time, starting on the grant date? Yes, I'm sure I can convince all the boards to do that right away...

Which method is right for you? It depends on the attributes of your grant. For some companies you may need to use Ratable for some grants and not for others.

Questions? Did I leave you confused? Drop me an email at edodge@sos-team.com. I'm happy to discuss further.

Elizabeth Dodge, CEP
Stock & Option Solutions


Elizabeth is the Vice President of Product Management for Stock & Option Solutions, Inc. (SOS). Her responsibilities include monitoring new developments in the equity compensation arena, performing market research, and solving clients' stock plan accounting challenges. .

Elizabeth regularly speaks on industry trends and product development at client and industry events including NASPP and NCEO webcasts, GEO and NASPP Chapter meetings, and the NASPP Annual Conference. She was also selected to speak at the West Coast FASB Roundtable on FAS 123(R) and co-authors the chapter on accounting for equity compensation in The Stock Options Book, by Alisa Baker. She became a Certified Equity Professional in 1999 and continues to volunteer for the Certified Equity Professional Institute as well as serving on the CEPI Curriculum Committee. She is also the president of the Silicon Valley Chapter of the NASPP and serves on the Board of Directors of the NCEO.

GEO's National Equity Compensation Forum (NECF)

Mark your calendars and register for GEO's NECF which takes place September 19-21 in Palos Verdes, CA. This year's conference features three subject tracks--Strategic Issues, Private and Pre-IPO Companies, and Administration & Communication--designed for all audience levels, and spanning 30 sessions.

SOS has spent a lot of time and energy to become involved in this event, and are pleased to announce that we will be participating in four sessions this year (more details in the next issue of Xtra). As a big proponent of GEO, and its goal of advancing knowledge and understanding of equity compensation worldwide through a global community of well-informed professionals, SOS looks forward to being a part of the success of this and future years' conferences. We hope to see you there!

Stock & Option Solutions is able to offer you an unbeatable discount!

As a sponsor of NECF, SOS is pleased to offer our issuer clients and contacts a discounted registration fee of $395. That is $100 savings off of the current $495 issuer special registration fee. To receive our discount, use the code SOSDISC when prompted for a registration code and you will pay only $395!

Register today and take advantage of this amazing price for the opportunity to spend quality, face-to-face time learning and networking in an intimate, comfortable venue. Visit http://www.globalequity.org/geo/NECF2012 for further details and to register.

SOS Product Spotlight: Stock Plan Accounting Solutions

Training on Accounting under ASC 718 / Training on Stock Plan Software

SOS Accounting Trainings are customized to your needs, your instruments, and your plans. Don't waste time learning things you don't need to know. Trainings can be performed at your business location or remotely via webex (if remote, trainings can be recorded for future reference).

Topics may include, but are not limited to:

Fair Value Reports/Inputs

Recognition of Expense

Forfeiture Rates

Diluted EPS

Tax Accounting for Equity Compensation


Audit stock plan reports

Calculating Forfeiture Rates

Are you calculating your forfeiture rates in a spreadsheet? SOS Accounting can help you automate the calculations, or just streamline your spreadsheet calculations to reduce your work load. In some cases SOS can help you move away from manual processes and use the reports that already exist in your stock plan software, entirely eliminating the need for a cumbersome manual process.

Modification Accounting

Whether your grant modifications are at termination, Type 1 or Type 3, whether there is incremental expense or not, SOS can help you get these complex calculations right! From option exchanges to accelerations to extensions of vesting to addition or removal of performance conditions, SOS has the expertise to help you with these calculations that most stock plans softwares cannot perform.

Accounting for ESPPs

Many stock plan systems have only limited support for the necessary ESPP accounting. Whether your plan requires modification accounting because it allows contribution increases during the period or has a reset or rollover provision, SOS can compute the necessary expense and give you the supporting documentation you need to fly through quarter-end. We've even come up with workaround using stock plan systems to allow modification accounting in the stock plan software. SOS has also assisted clients with automating processes to calculated ESPP expense for each department, when many systems only report in the aggregate. Truing up expense at the time of purchase can also be complicated. Remember that true ups based on the original fair value should only be performed for salary changes (or bonuses) and terminations. Decreases and voluntary withdrawals from the plan should be ignored. Increases to contribution rates should be assigned a new fair value and accounted for separately. Tax accounting and diluted EPS for ESPP are also areas of SOS expertise.

Accounting for Non-employee Grants (Options and RSUs)

Some systems support mark-to-market accounting for options, but not RSUs. Other have no or only limited support for non-employee accounting. SOS can provide spreadsheets to ease the calculation, review the spreadsheet your are currently using (many of which are materially wrong, in our experience), or write a custom report to make the process even faster and easier.

Recalculating and Confirming Software Expense Amortization

Are you baffled by your software's expense calculations? Let SOS demystify the calculations for you and your auditors. Explaining, documenting and proving out the calculations are all quick and easy on many software systems.

Tax Accounting

Do you understand tax accounting for equity compensation? Let SOS explain it in plain English. Does your software system have limited tax accounting capabilities of which you are unaware or which you supplement with manual calculations? Let SOS review your calculations and test their compliance. Do you have complicated transactions such as repricings or option exchanges in your history? Let SOS automate the tax accounting calculations to take the pain out of your quarter-end.

Calculating and Confirming Deferred Tax Asset (DTA) Balances

Deferred Tax Asset balances are coming up more and more frequently as an audit item at quarter or year-end. The balances are getting higher each year so companies are being asked to "prove out" the balances. You may be asked for "expense booked for outstanding grants" which most systems cannot provide. SOS can do a one-time spreadsheet calculation (usually in a couple of hours or less) using data from your stock plan system (we've used two different approaches that have both passed audits, one of which should work for your company), or can build a custom report that can be run quickly whenever you need the data.

Diluted EPS Calculations

Whether you have grants that your system's reports don't include (non-employee grants, unusual performance grants, etc.), SOS can help you get these calculations down to a science with automation techniques you will love.

Journal Entry Calculations/Automation

SOS recently created a custom report, based on an existing online report that performs the necessary calculations for RSUs with share withholding. Whatever your journal entry challenges, we can help you too.

System Conversion Accounting Reconciliations

Switching systems or brokers and stumped by the differences you're finding when you compare expense, diluted EPS or tax accounting reports? Let SOS leverage our expertise to accelerate this process and explain the differences away.

Accounting for Mergers and Acquisitions

Many systems have limited support (if any) for the necessary accounting at the time of an acquisition. SOS has helped clients understand and automate these calculations, taking some of the pain out of the always painful transaction.

Accounting for Private Companies

Private companies face different accounting challenges than public companies, but the auditors still crawl through their books periodically. Lack the equity compensation accounting experience in-house? Let SOS perform your accounting for you, get your procedures polished, or train your in-house personnel.

Accounting Memos for Stock Plan Issues

Sometimes you need a memo. No one likes to write them, but sometimes they must be done. Let SOS find the right ASC 718 support and document the issues for your in-house personnel and your auditors.

Assisting with Auditor Questions

Are auditors using up your valuable quarter- or year-end time with too many questions? SOS can help alleviate the burden and answer many of these questions for you. From why the including forfeitures expense is higher than the excluding forfeiture rate expense to why doesn't their diluted EPS calculation match the software's calculaton, let SOS explain your worries away.

Accounting for Performance Options

Many systems now support accounting for Performance RSUs, but most still lack support for accounting for performance options. SOS can develop spreadsheets, custom reports, and processes that make recognizing expense for these instruments fast and easy.

What our accounting clients are saying:

"I'd highly recommend SOS to anyone considering training on stock plan accounting. The training my company received was clear, concise and on point at all times. SOS tailored our training to meet the specific needs of our company which was priceless when considering the knowledge obtained from the course."

"The SOS team was phenomenal. I felt like I received the best training possible. They were timely, accurate and very pleasant. They are experts in stock plan accounting, and I knew that I could rely on the information that was being provided to me."

"I just had to stop to tell you I am almost gleaming while booking Q3 stock comp. I used to dread it, but now with the new custom report - it is a piece of cake. I feel in charge and in control of the report and numbers now, rather than just assuming my software is doing everything correctly. I am just about done with the analysis for the quarter, and only spent a couple hours on it."

"I received a quality product prepared by a knowledgeable and trusted source. The documentation that accompanied the custom report was extremely useful."

To learn more about the SOS accounting and software training, please contact us at (888) SOS-0199 or email us.

SOS Xposé

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

New Jobs...Emily Cervino is the new Vice President, Marketing at Fidelity Stock Plan Services...Julian Clark has joined AST and its partner, Canadian Stock Transfer (CST) as Managing Director of Canada and Executive Vice President of Business Development and Strategy for all of North America. More information can be found in this press release...Josh McGinn also recently joined AST as Senior Vice President of Relationship Management to open and manage a West Coast Office in San Francisco. Read more here...Greeshma Shenoy had joined Solium Capital's sales organization in the UK...More from Solium, where Justin James has a new position as a Vice President, Executive Services, and Lisa Bertolet has a new position as Shareworks Premier US Account Manager...Susan Berry recently joined FireEye as Manager of Stock Administration...Terry Piccolo has joined Workday as their Stock Administration Manager...Tracy de Swiet recently joined Cisco as Manager, Global Stock Plan Services...Congratulations to everyone on their new jobs!

Honors...Emily Van Hoorickx was recently named to Barron's Top 100 Women Financial Advisors. Congratulations, Emily!"

Baby Bump...Pam Ellis of Solium and her husband Frank are expecting a baby on December 6th. Because of Pam's longtime roots here, we are sure that the first three letters of the alphabet her baby will learn will be "S-O-S". Congratulations, Pam and Frank, from everyone in the SOS family!

Industry News...In April, Two Step Software announced their company name change to Corporate Focus. You can read that announcement, and other news from Corporate Focus, here...Another name change to note is that Norse Solutions has changed their name to Accurate Equity. Read their press release here

Did you miss an issue of Xtra? View our complete newsletter archive from our website here
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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.
Stock & Option Solutions | (888)SOS-0199