Treasury Stock Overview
Under ASC 260, to calculate Diluted Earnings per Share (EPS), you must use the "Treasury Stock Method". The Treasury Stock Method requires that you assume all potentially dilutive instruments are both fully vested and exercised immediately to determine their impact on the earnings per share of the company. This worst case scenario is then mitigated by using the "assumed" proceeds from the hypothetical exercise (or release) of the equity compensation instrument to "buy back" shares on the open market, using the average market value of the stock during the reporting period.
Generally we break this process down into 5 "easy" steps:
Elizabeth Dodge, Vice President
- Exclude underwater options
Because underwater options would increase rather than decrease the dilutive impact of your equity instruments, these grants are excluded from the calculation. These are considered "anti-dilutive" grants. But grants can be anti-dilutive without being underwater. See step 4, below.
- Weight shares for time outstanding during period (WSO)
This is straight-forward if you are dealing with a grant or a cancellation during the period, but becomes more complicated if you have multiple transactions for a single grant. In some cases it may be acceptable to simplify the calculation and simply use (beginning shares outstanding + ending shares outstanding) / 2.
- Calculate exercise proceeds & "buyback shares"
There are three sources of assumed proceeds, per ASC 260.
- Exercise price:
This one is fairly simple to understand and very easy to calculate. This is the actual money received for the exercise price for options at the time of hypothetical exercise. The calculation is simply weighted shares outstanding * exercise price. Obviously for restricted stock/restricted stock units (which don't generally have an exercise price), this is zero.
- Tax benefit:
This source of assumed proceeds reflects the tax benefit that will be recognized by the company at the time of exercise or release. First you calculate the hypothetical gain from the hypothetical exercise/release by subtracting exercise price (if any) from the average market value during the period. If there is no gain, the number is set to zero. Then the grant date fair value is subtracted. This number can be a negative number when/if the hypothetical gain on exercise is less than the grant date fair value for the award. This reflects the possibility of a "shortfall" or tax deficiency and is treated as a "reduction to assumed proceeds" per ASC 260.
- Average Unamortized Expense during the Period:
This is the most difficult assumed proceed to explain. Clients have asked again and again why this is included as a "proceed from exercise" and we've never heard a thoroughly convincing answer. We include it because it's part of the applicable accounting standard, whether it makes intuitive sense to include it or not. This is generally calculated using the beginning unamortized expense added to the ending unamortized expense and divided by two.
- Sum 3 components (A + B + C) /Average Market Value = total "buyback shares"
- If buyback shares > Weighted Shares Outstanding (anti-dilutive), exclude grant
Just like step 1, above, if the buyback shares exceed the Weighted Shares Outstanding the result would increase, rather than decrease the diluted EPS, which again is counter to the purpose of ASC 260. So any grants that fall into this category are excluded.
- Weighted shares outstanding minus buyback shares = dilutive shares to include in diluted EPS calc in addition to common stock.
Stock & Option Solutions
Elizabeth is the Vice President of Product Management for Stock & Option Solutions, Inc. (SOS). She also runs the Strategic Solutions and Accounting Solutions groups. Her responsibilities include monitoring new developments in the equity compensation arena, performing market research, speaking at industry events and helping SOS clients with all kinds of equity compensation challenges.
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Free SOS Educational Webcast:
Voyage to the End of the Year:
Complying with Year-end Regulations
Year-end is always a challenging time and hopefully you're already well into preparing for it. From D&O questionnaires to getting tracking dispositions to getting data cleaned up for W-2 and 6039 reporting to those fabulous year-end tax packages, companies have a lot of compliance responsibilities.
Please join us for our next educational webcast on November 20 at 11am Pacific Time, 2pm Eastern Time.
Which are the key items you should be addressing now and which items can you put off until later? How do you attack all the year-end items while still getting your "day job" accomplished?
Join our expert panel that will share and review:
- A suggested year-end checklist
- Tips and tricks that have been used to survive prior year ends
- Process-smoothing ideas that can be implemented quickly
(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.)
Have you SEEN the SOS Portal?
(It helped Synopsys win the Best Use of Technology Award from GEO this year!)
...tender tidbits about people and players in our industry...
Office with a view... Kimberly Steele is working now with Apple as Sr. Global Stock Plan Administrator in the Stock Plans department. Mike Palermo has rejoined Fidelity Investments as Vice President. Allan Golotko has transitioned into his new role at Morgan Stanley as part of the Global Stock Plan Services team in New York as Head of Product Management. James Clark is the new Vice President, Global Compensation at Yahoo! and John Hammond is the new C-3PO for Plan Management Corporation.
Scratching at the door... Because Elizabeth Dodge from Stock & Option Solutions wasn't busy enough, she and her family recently adopted a 3-month old Chihuahua Terrier mix from Pets in Need. Her name is "Jem" in keeping with the household To Kill a Mockingbird theme and joins Atticus, Boo and Scout, in making up the menagerie of two dogs and two cats. Kids Joshua (9) and Melia (7) couldn't be happier, but Elizabeth has recently been quoted as saying "What was I thinking, adopting a puppy?" Gary Cogger, also of SOS, has added a new member to his family. Lily, was rescued from the Human Society last month and they walked on October 5th in the Walk & Wag 5k to help raise money for sheltered pets. The walk raised $226,000!
A trip down the aisle... Ron Snitker from UBS married his partner of nine years, Doug Alexander, in Mason City, Iowa on Saturday, October 5, 2013. See a pic!The couple plans a 2014 honeymoon.
A family grows by two feet...Maria Caldwell from Fidelity Stock Plan Services welcomed a baby boy, Cameron, on July 5th, 2013 weighing 6 pounds and 15 ounces and measuring 19 inches in length.
And baby makes three... Daniel Alejo of SOS and his new bride, Frances, are expecting their first baby in February, and it's a girl!
Industry News... Performensation has a new address! Still catch them at the same email, website and phone numbers, but here is the new physical address: 548 Market Street, Suite 773-49 San Francisco, CA 94104. RoseRyan/Performative webinar to be held on October 29th, 2013 on best practices in understanding and increasing your company valuation. More info here.
SOS is hiring and here are our recent additions:
Rachel Meyers (Strategic Team)
Clay Jones (People Solutions)
Andy Brown (People Solutions)
Kristi Oberson (People Solutions)
Chris Hannum (Sales)
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