header.jpg

April 29, 2014
Volume 7, No. 2

In this issue:

An Excel Function You Shouldn't Be Without- Index Match

Forfeiture Rate Update

SOS Introduces Training on DTA Balance


Free SOS Educational Webcast: Ready, Set, Release! Streamlining and Simplifying your RSU Release Process

SOS Xposé


Subscribe to Xtra!
Request a call from an SOS Team Member to get answers to your questions and further discuss your needs-click here
SOS Employment Opportunities

From the SOS Library:

Proxy Reporting Pitfalls


From the SOS Webcast Archive-

Taking Ownership of Share Ownership Guidelines


Our Services: 

People/Staffing

Equity Compensation Projects/Consulting

SOS-TEAM Outsourcing


Contact Us:

On our webpage

xtra@sos-team.com

888-SOS-0199
 

An Excel Function You Shouldn't Be Without- Index Match

Is vlookup() your best friend? It's mine... from period close to conversions and reconciliations and finding that ONE missing share...I've become dependent. But over the last few months, I discovered something better. Then over the last week, I finally perfected my ability to use it without thinking (just like vlookup). Drumroll... index match...

Why is it better than vlookup?

  • It reduces file size and increases file speed
    Because vlookup looks at a target MATRIX of data (column B to column AX, for example), vlookups make files big and slow. Have you ever dealt with tranche-level data? Hundreds of thousands of rows in tab 1 looking up in tab 2, also with hundreds of thousands of rows? Be ready to get a cup of coffee because that filter you just applied is going to take 20 minutes to work, even on my laptop with four fast processors. Index match only looks at THREE columns: the one with the data you want returned, the one you are trying to match from and the one you are matching to. Better, stronger, faster.
  • It's harder to break
    Vlookup, as we discussed above, looks up in a matrix of data. Start here and go to here and match in the 27th column of data. So what happens if you insert a column? Or delete a column? Suddenly your vlookup is returning the wrong value - which may or may NOT create an error in your spreadsheet and it's more dangerous if it doesn't create an error, because you're much less likely to find the error.
  • You can look up from RIGHT to LEFT, not just left to right.
    Vlookup requires that the column you are attempting to match be on the LEFT side of the "matrix" from which you will return a value. Index match works whether the "key" is on the left or right of the data you are trying to pull in.

  •  
    It is a little harder to use than vlookup, since it combines two different Excel functions (at least I thought so at first). But after using it a few times, you will get the hang of it. And it will be well worth the effort!
     
    The syntax is:
    =index(column in target data source I want a value FROM, match(column in source data I'm matching, column in target data I'm matching,0))
     
    Online Demo of Index Match
     
    Please send us an email to info@sos-team.com with any questions or suggestions.


    Elizabeth Dodge, CEP, Vice President
    Stock & Option Solutions
    edodge@sos-team.com
    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.

    Forfeiture Rate Update: True Up at Forfeiture (Dynamic) Overtakes True Up at Vest (Static) As Most Popular True Up Method


    In August of 2011, SOS conducted a survey on forfeiture rate practices, how were they being estimated, which data was used, how companies were applying them, when were they truing up, etc.

    Just last month we conducted the same survey and found that not much had changed. Except that truing up for actual forfeitures at the time of forfeiture (also known as the "dynamic" method) has now eclipsed the once more popular method of truing up at vest (also known as the "static" method).

    In 2011, 59% of all survey respondents indicated that they performed the true up at the time of vesting. In the 2014 survey, that number has dropped to 24%. Truing up at forfeiture got only 32% of respondents in 2011, but in 2014 now has 41%. So, as we suspected might be "true"(pun intended), True Up at Forfeiture is "winning", but why? What is the difference and what are the pros and cons of each approach? Read on...




    Application of Forfeiture Rates

    The examples of how to apply the forfeiture rate in ASC 718 discuss a group of grants and the total expense for the grants. They apply the annualized forfeiture rate (to the power of the service period) to the total expense throughout the life of the grant and if the forfeiture rate proves inaccurate during the period, the rate is adjusted.

    In the examples, the forfeiture rate is applied using the three-year service period throughout the three-year life of the grant (a 3% annual forfeiture rate is applied using .97*.97*.97). Adjustments are made to the forfeiture rate throughout the vest period, if the total number of grants that will be forfeited is estimated to be more or less than 14% (1-(.97*.97*.97), but any necessary true up for actual forfeitures is not performed until the final vest date for the grants is reached, at which point the final count of grants forfeited vs. vested is known.

    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% (one of the five grants), you would recognize 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 only as they occurred (as they were permitted to under that standard).

    The Static Method

    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 used to apply the estimated rate nor the total expense is adjusted during the recognition of expense - it is static, unchanging. This method is also called "True Up at Vest" since both reversals of expense and true ups for vesting occur on the vest date. Forfeited grants remain within on the expense report and 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 true up at vest date would be larger. (See the discussion on "the hybrid method", below.)

    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.

    Since the forfeited grant remains on the report and in "the pool of expense", the forfeiture rate continues to be applied with the full service period, the expense for the grants that ultimately vest would be: $20, $20, $20, and $40. The expense for the grant that is forfeited would be: $20, $20, $20, and -$60. The negative $60 for the true up for the forfeited grant exactly offsets the "catch up" for the grants that vested, for the expense by quarter would be $100 each quarter, exactly what the standard is aiming for, even amortization over the service period.



    Because the forfeiture rate is perfectly accurate, the recognition of expense is perfectly even over the service period.

    The most significant issue 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 you haven't been making adjustments to the rate as the grants are expensed based on actual forfeitures, the true up impacts your expense all at once, in the quarter in which the grants vest, potentially producing large fluctuations in expense.

    If, in the example above, no grants are forfeited (forfeiture estimate is too high), the total expense per quarter would be $100, $100, $100, $200. Since all grants vested, each grant is trued up to 100% of expense in the fourth quarter on the vest date.



    If, in the example above, two grants are forfeited instead of one (forfeiture estimate is too low), the total expense per quarter would be $100, $100, $100, $0. Since two grants forfeited all expense booked for them ($60 each, $120 total) is reversed in the fourth quarter and the three grants that vested are trued up to 100% of expense, but that does not offset the unexpectedly high reversal.



    If the forfeiture rate is adjusted from 20% to 40% in the third quarter, when the second grant is forfeited, to reflect the now more accurate 40% rate, each grant would now amortize at only $10 per grant in the third quarter and then true up for vesting and forfeiture in the fourth quarter, which would result in total expense each quarter of $100, $100, $50 and $50. This is still a significant fluctuation in expense, but less dramatic than waiting until the final quarter and taking the full adjustment then.

    The Dynamic Method

    The alternative approach to the static method 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. (Every system that offers "dynamic" as a forfeiture method approach differs somewhat in the formula used to reduce the rate, but most systems do reduce the rate as the vesting nears.) 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. So for each of the grants that ultimately vest, the expense would be, each quarter: $21.15, $23.57, $26.21, and $29.07. For the grant that is forfeited, the expense would be $21.15, -$21.15, $0 and $0, resulting in total expense of $105.75, $68.29, $94.56, and $131.40. This expense is certainly not perfectly even over time, but it is more even than if the forfeiture rate were inaccurate and all of the adjustments were made in the final quarter of the year.



    Though the expense is less even over time using the Dynamic method than the Static method, if the forfeiture rate is accurate, 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 recognized. 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.

    And when forfeiture rates are too high, the Dynamic method results in a gradual increase to expense over time.



    And when they are too low, there is an immediate impact to expense in the quarter in which more grants are forfeited, but then a gradual upward trend in expense.



    The "Hybrid" Method (True Up at Forfeiture AND Vest)

    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 used to apply the forfeiture rate, the recognition each quarter would be only $80 (($400 *.25) * (1-.20)^1). This would result in under-recognition of expense over the one-year service period, which must be trued up at the vest date.

    If the 20% estimated forfeiture rate proves 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 for the grants that ultimately vest would be $20 for each quarter until the final vest period in which each grant would "catch up" from the $60 booked through the end of the third quarter to the full $100 of fair value for the grant by booking $40. The expense for the 5th grant that is forfeited would be $20, -$20, $0 and $0, so total expense by quarter would be $100, $60, $80, and $160, which is certainly not the even amortization over the service period that the application of estimated forfeiture rates is intended to produce.

    Even though removing forfeited grants from the report in the period in which they are forfeited seems to make more sense...it results in a very uneven amortization of expense. Even so, several stock plan systems do use the hybrid method.
     
    Static vs. Dynamic Pros & Cons



    And, based on our survey results, it seems to be that more clients are now in favor of the "set it and forget it" method of forfeiture rate application (aka Dynamic).

    Does your system offer a choice between Static and Dynamic? Considering changing from Static to Dynamic? SOS has helped a number of clients perform this analysis and change over the past few years. The process can be quick and easy and usually is fairly painless. However, the difference between the two approaches can be small (the smallest we've seen was $8K) or quite large (millions) and you need to be prepared to book a true up for the difference to enable you to switch. Generally a grant-by-grant comparison should be performed and the reasons for the difference quantified and a memo should document the analysis.

    Questions? Contact us at info@sos-team.com for more information and an estimate on helping your company switch.

     

    Elizabeth Dodge, Vice President
    Stock & Option Solutions
    edodge@sos-team.com
    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.
     


    What happens in Vegas doesn't stay in Vegas...SOS will be at the 22nd Annual NASPP Conference in Las Vegas September 29-Oct 2, 2014. Stay tuned on what we have in store for you at our booth this year!

     Become a fan of SOS
     

    twitter  FB  YouTube

     

 

We want your input! Send us ideas on what you want to read and learn about.
Suggestions for articles and webcasts are welcome. Please email us at xtra@sos-team.com.


Stock & Option Solutions Introduces Training Courses on DTA Balance

Have you ever gotten this question from your tax or accounting team: "Can you give me the cumulative/life to date amount of expense booked for all the currently outstanding stock options?" If not, start getting ready for it since it's coming up for more and more and more SOS clients. This is the tax accountant's way of asking for the data they need to "prove out" or "validate" the Deferred Tax Asset (DTA) balance related to equity in your General Ledger.

Most systems don't have a report that readily provides this number, but it IS something you can do in a spreadsheet, generally bringing in data from two to three standard system reports.

Two different sessions, offering training on two different methods, both offer 1.25 hours of Certified Equity Professional continuing education credit for attending.

SOS Online Training: Proving your DTA Balance in Excel - Tranche-Level Method

The approach covered in this session is for companies using a system that provides a report with "Shares Outstanding" and "Cumulative Expense, net of estimated forfeitures", at the vesting tranche level. Not all systems provide this information. If you are unsure whether your system can provide this information, please email us at info@sos-team.com and we will contact you to discuss.

May 22nd, 2014

10am-11:30am PT


SOS Online Training: Proving your DTA Balance in Excel - Grant-Level Method

The approach covered in this session is for companies using a system that DOES NOT provide a report with "Shares Outstanding" and "Cumulative Expense, net of estimated forfeitures", at the vesting tranche level. Not all systems provide this information. If you are unsure whether your system can provide this information, please email us at info@sos-team.com and we will contact you to discuss.

May 29th, 2014

10am-11:30am PT


Did you know SOS is hiring? Your dream job is here.


Free SOS Educational Webcast:

Ready, Set, Release!
Streamlining and Simplifying your RSU Release Process
 



Please join us for our next educational webcast on May 20, 2014 at 11am Pacific Time, 2pm Eastern Time.

Description:

Restricted Stock Units (RSUs) have become one of the most commonly used equity vehicles for employee compensation.  There are many challenges to handling RSU grants, such as taxation, accounting, and grant agreements, but the most important aspect of this equity has to do with delivering their value to the employees - otherwise, there's not much point in having them.
So what does that mean to you?  It means knowing the release process, from start to finish, preparing for the release, auditing reports and employee taxes, and communicating the release to the involved and impacted parties both internal and external.  This webcast will help you make sure you have all the tools you need to have a successful and streamlined RSU release.
 

Speakers:

(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.)

Register


Aspirations is on November 4, 2014- SAVE THE DATE!


SOS Xposé

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

Drinking coffee at a new desk....  John Williams joined the team at Solium as the Senior Vice President, Relationship Management. Cathy (Pecora) Reynolds is now a Managing Director at ISP Advisors LLC.

Promotion time...Kimberly Hackman has been promoted to the Sr. Manager, Global Stock Plan Services at Amazon. Daniel Kapinos has been promoted to Director at Radford, an Aon Hewitt Company and Carly Campioni is now the Associate Director at Radford, an Aon Hewitt Company..

Based on a true story...Louis Rorimer, a long-time contributor to the NASPP and currently the editor of the country guides in the NASPP's  Global Stock Plans Portal, is the son of one of the original Monuments Men that the new hit movie is based on. 

SOS is hiring and here are our recent additions:

Cameron Carter (Outsourcing)
Tom Goodrich (People Solutions)
Lucy Moffitt (People Solutions)
Billie Olson (People Solutions)
Mohamed Zohny (People Solutions)
 
 


Have you worked with SOS and want to share your story with others? We now have an easy way to do that!    
Write a testimonial
.


Did you miss an issue of Xtra? View our complete newsletter archive from our website here
Miss a webcast? You can find links to recordings, as well as the materials, on our Webcast page


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
SOS Xtra Editor: Shawna Casey