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November 12, 2015
Volume 8, No. 6

In this issue:

Who's Afraid of Equity Comp Accounting? 

Perfecting Period Close 

Product Spotlight: Accounting Products

SOS Consultant Corner: #EquityAccountTalk
 

Free SOS Educational Webcast: Defeat Disturbing Dastardly Disclosures!

Across Our Desk

SOS Xposé


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Accounting Answers: DTA Balance Proof - The Devil's in the Details 


From the SOS Webcast Archive:

The Mod Squad: A Guide to Modification Accounting for Stock Plan Professionals 


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Who's Afraid of Equity Comp Accounting?

With Halloween just behind us, we’re prepping for year-end craziness here at SOS; but those scary trick-or-treaters got me thinking about things that many stock plan professionals fear. At the top of the list seems to be accounting (and spiders). But why?

“I don’t do accounting.” “Finance handles that.” “I’m not involved in that piece.” Familiar refrains when it comes to accounting for equity…and tax accounting…and diluted EPS. But, quite honestly, most equity compensation professionals are much better equipped to deal with the accounting “side” of equity than their accounting and finance colleagues. Why? Because you GET equity. You understand the differences between RSUs and Options, vesting schedules and modifications and corrections after the grant agreement is signed, vested cancels vs unvested forfeitures, ISOs, exercises, releases. And you know your Plan(s) as well. There is a vast amount of relevant knowledge that you wield that your accounting counterparts do not, much of which directly impacts accounting for equity plans.

So, why do so many of my colleagues stick their heads in the sand when it comes to accounting? It’s not astrophysics. It’s not even trigonometry or calculus (both of which terrify me). I was an English major who started learning about equity in my 30s, for goodness sake!  And I now know more about accounting for equity than your average bear. My best guess is that it’s just a fear of the unknown.

But, honestly, if you are one of those who shy away from accounting, go ahead and take the plunge! Take a basic accounting for equity comp class, listen to a webcast or read a book published by the NCEO. (I recommend Chapter 10 of the Stock Options Book by Alisa Baker, with a special guest author.) The concepts are understandable. The math is basic (mostly addition, subtraction, multiplication and division, with the very occasional exponent thrown in for good measure) and the rewards are great. People outside of equity wrongly think that anyone can communicate to employees about equity effectively; however, they think that those wielding expense numbers and diluted EPS projections are magicians.

So, step off that cliff! Don’t be afraid of accounting; you will thank yourself for your foresight and your courage for years to come!

Elizabeth Dodge, CEP, Vice President
Stock & Option Solutions, Inc.
edodge@sos-team.com
Elizabeth is a Vice President for Stock & Option Solutions, Inc. (SOS). She also runs the Professional Services group. 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.

Perfecting Period Close

We see this time and time again: a client performs their period close reporting and starts to reconcile the output and then realizes something isn’t right or that the beginning data points do not match the prior period end points.  Of course they are stumped and it is the day prior to the deadline for booking the expense.  After a rush to dig into the data and identify the issues it is determined that a prior termination was entered, the valuation records were missing on the grants, the department code was never updated, etc.  Now the real panic sets in, document the issue, correct the bad data, re-run the reports.  If these differences are not caught prior to the auditor’s review, there could be concern about the process and SOX compliance. A material weakness could be uncovered. No one wants that!

We recommend that clients get ahead of these scenarios by performing some quick audits just prior to the period close and correcting or documenting the issue before it becomes a problem.  One of the first ways to jump ahead of these potential situations is to re-run your prior period reports several days in advance of the new period ending.  Verify if the data points (shares balances, shares outstanding, granted, exercised, cancelled, expense, etc.) match your prior period reports.  If not, then you have time to dig in and understand what happened.  Did someone enter a late termination?  Did someone enter a late transaction? Did a fair value get changed by accident or even worse, dropped off the record entirely?  Why?  What process improvements would prevent this in the future?

Some systems do allow you to “close the period”, a common practice in accounting software, but it's something that has been more recently introduced in stock plan software, at least in a few platforms. Using these features can ensure that the post-dated transactions or terminations don’t impact your prior expense, but they don’t help you explain the variances you see from this period to last. Again, you have to dig in, do a “flux analysis” and figure out what happened to that grant after the period was closed to make the expense so different from one period to the next.

The other common mistake we see happening during period close is the retention of an incomplete set of reports.  Many equity systems allow for the reports to be produced in either an Excel or .PDF format and, in some cases, both.  For very good reason, we see the .PDF version retained since those tend to be the Auditor’s request.  A .PDF report is not easily “manipulated”.  However, using a .PDF report to perform any type of comparison or research into data issues is not feasible.  Excel, on the other hand, is easy to use for comparison and research.  So, if your system provides reports in Excel, USE them, SAVE them.  It’s a great backup to the .PDF.  In addition, some systems provide detailed excel backup to the overall expense and other financial reporting needs.  These too should always be retained.  We love those expense reconciliation questions where the CFO wants to know why X didn’t equal Y and then hands over the system’s expense summary report in .PDF or a report with one row summary per grant….or, even better, the LAST page of the expense report. SCANNED. No details. UGH. Further, some systems provide a view of the data with all the “gory details” (tranche level, current and prior forfeiture rates, expense with and without forfeiture rates applied. Save these too. You will be so happy you took the extra 15 minutes to save off the detail when your expense doesn’t tie.

Equity systems generally provide the user with a multitude of user specific fields for adding certain flags, tags or identifiers to a participant or grant record yet the client is afraid to use these or uses them inconsistently.  Work with your internal partners to understand which flags might be useful and then put a plan in place for using these user-defined fields. And keep an external record of the business reasons for the codes in these fields and the valid inputs.  These can be very helpful in running any period close report by allowing for filtering for groupings, inclusion or exclusion of certain data. 

That being said, though, we sometimes find filtering of reports can also lead to double counting or even exclusion of grants if not properly used.  An example of this is with expense.  Clients will set up their expense reports to run several sets for different grant type parameters.  Then using those reports, they manually add up the totals for their end use.  They don’t run a full set of the same report (no parameters) and never realize that the total expense doesn’t match to the sum of their reports…ACK.  Why not use your flags, run custom output reports (if available), export to EXCEL and then using a summary tab in the workbook, create totals by the respective parameters using SUMIFS or pivot tables?  This way you can capture what you need, in the buckets you need it and still tie back to the total.  If the auditors require a .PDF, show them how you proved to the total(s) on the .PDF system generated report and they should be comfortable. 

Lastly, to build a better period close process, build a checklist:

  • All data updates complete - √
  • All cost center/department codes updated - √
  • All Market values entered - √
  • All dispositions entered - √
  • All grants assigned a fair value - √
  • All grants assigned a forfeiture rate- √
  • Re-run prior period - √
  • Run current period (EXCEL) - √
  • Run current period (PDF) - √

Using these tips will help you perfect your period close and make your auditors happier too!

Julie Kenia, CEP, Senior Equity Compensation Consultant 
Stock & Option Solutions, Inc.
jkenia@sos-team.com
Julie joined the team at Stock & Option Solutions, Inc. (SOS) in 2006 and has been assisting clients with an extensive array of projects including stock option exchanges and repricings, data clean up and conversions, vendor searches, 6039 compliance, stock plan best practice reviews, training, day-to-day administration, and accounting related reconciliations. Julie became a Certified Equity Professional in 2008 and is a member of the Professional Services group at SOS. 


Outsourcing the management of your stock plans will help you get your time and energy back. Learn more about how SOS can help you this holiday season & beyond

Product Spotlight: Accounting Products

SOS offers a number of products that can make your accounting tasks less onerous and more audit friendly.   

Are you struggling with your Deferred Tax Asset balances?  How do you calculate your volatility?  Maybe you are just not sure how to capture your Non-Employee expense or modifications to your expense.  Let us help you find a solution. 

  • DTA Balance Proof Application
    • Performs in minutes vs. hours
    • Uses a balance sheet approach to prove out the rollforward version that may have years of accumulated issues
    • Compares expense booked to expense reversed to find any discrepancies
  • Volatility Calculator
    • Saves hours of manual spreadsheet work
    • Calculate for multiple peer companies with different weightings, include your own historic volatility
    • Automatic download of market values via a Yahoo! Finance API
    • Calculates for multiple dates and multiple terms with a single run
    • Output in an easy-to-use table format
  • Expense Forecasting Application
    • Projects expense by quarter for the next two years
    • Continues to apply a mid-point forfeiture rate for shares as the vest
    • Categories expense by cost center or location
  • Diluted EPS Application
    • Supports non-standard situations many systems can’t support (early exercise, prospective adoption of ASC 718, etc.)
    • MS Access based application takes the risk out of manual processes
  • Flux Analysis
    • Quantifies and explains the reasons for expense variance from quarter to quarter, month to month
    • Categorizes by new grants this and prior period, terminations, vesting changes, etc.
  • Non-Employee Expense
    • Mark-to-market expense until vest date, straight-line or accelerated attribution
    • RSUs or Options
    • Calculates option fair values automatically using remaining contractual term, as required by ASC 505
    • Auditable and supportable
  • Modification Accounting
    • Type I & Type III or combinations
    • Exec modifications at termination or large modifications for repricing/option exchanges
    • Assistance determining correct approach and shares impacted
    • Customizable
  • ESPP Expense
    • Basic expense solutions
    • Modification solutions for increases, resets, and rollovers (coming soon!)
  • Forfeiture Rate Analysis and True-Up at Vest vs. True-Up at Forfeiture Analysis
    • Assistance developing a process to calculate the “right” forfeiture rate, with minimal time and effort
    • Standard process overcomes issues inherent in many system’s reports
    • Easy, repeatable, and auditable process, reviewed by Big 4 audit firms (for clients)
    • Understanding your rates and the impact of switching from one method “Static” to “Dynamic”
  • Accounting Expertise
    • Ad hoc assistance on questions on expense, modifications, disclosures, diluted EPS, tax accounting, and forfeiture rate application, etc.
    • Auditor support on some systems (explain calculations, answer accounting questions)
  • Performance Grant Assistance
    • Get your system set up to handle expense and diluted EPS correctly, no matter how complex your performance awards
    • Spreadsheet calculations for performance options
  • Memo Creation
    • For modifications, spreadsheet calculations, forfeiture rate calculations and many more…
  • Streamline/automate spreadsheet calculations
    • Either continuing to use spreadsheets, but with enhanced formulas that reduce/remove risk or automating via an MS Access application
  • System Accounting Training (not available for all systems)
    • Inputs, system use, expense recognition, diluted EPS, tax accounting, etc.
    • Our experts can train you onsite or via remote meeting software (sessions can be recorded for future reference
Contact SOS for more information about these SOS Accounting Products and many more!
 

SOS Consultant Corner: #EquityAccountingTalk 

Valuation?  Forfeiture Rates?  Diluted EPS?  What the heck do you do with the grants for someone changing from a consultant to an employee?  Or vice versa? Or better yet, why would you want to know anything about that?  My question for you is, do you speak "Equity Accounting"?  If not, you're in luck, because you've come to the right place.  Here is a quick introduction to the subject that can actually be foreign to many people who are otherwise heavily involved in the world of equity compensation.

Our intent with this article is not to get into a lot of detail and advanced topics of accounting, but to at least give you an idea about why accounting matters, what a few of the common terms mean, and how it all works together in a very basic sense.  We aren't neglecting those other topics, but instead we'll just save those for future Xtra articles, after you have the basics down. So, what is Equity Accounting exactly?

The subject of Equity Accounting refers to the way in which equity compensation has to be reported by a company as an expense.  What you might know as a nice benefit to your employees doesn't come free to the company.  And because it's not free and it impacts your financial statements, it needs to be done right in order to not waste the whole purpose of having equity compensation in the first place.  The main steps to this kind of accounting are HOW to value equity vehicles, and how to APPLY that value to the company's books.  The first part, the valuation, is done based on to whom it is being granted, and what kind of grant it is.

For accounting purposes, an "employee" is defined as someone who gets a W-2 from the company, but it also includes non-employee directors.  A non-employee is basically anyone else, who gets a 1099 from the company.  What's the difference accounting-wise?  Well, an employee award is valued at the time of grant, and that value does NOT change through the life of the grant.  For a non-employee, it is initially valued at the time of grant, but the recognition of that value is re-measured each reporting period until each tranche vests.

So whether an award is valued at grant, or it keeps getting revalued every reporting period, how do you determine that value?  For full-value grants, such as Restricted Stock Units (RSUs), the value of one share is equal to one share of the common stock on the market, and most commonly the closing price of the stock on the date of grant is the value used.  For stock options and an employee stock purchase plans (ESPP), it's a bit more complicated, but a very common calculation used is the Black-Scholes Option-pricing Model.  The model factors in several things, including the expected life of the grant (term), risk-free interest rates, dividend yield of the stock, along with the price of the option and the value of the stock on that measurement date (generally the grant date).  Once the Model performs its magic, it spits out the value per share to be applied to the grant. The full value of the grant is equal to that per share value multiplied by the number of shares granted.

And once you have the value, the other part of the accounting process is to apply it.  There are different ways to go about it, but applying the value refers to how much of the value you will "expense" in the company books during a reporting period.  Once some of that expense has been "booked," that amount is considered "amortized."  The grant's expense is amortized over the vesting period until the full value of the grant has been reflected.

Of course, there are many other aspects and details not covered in this article, such as applying forfeiture rates to that expense as it is being amortized, and what happens if someone leaves the company before their grant is vested, but you'll just have to stay tuned to SOS Xtra to find out how those work.  For now, just know that you're that much closer to understanding what the accountants are saying at the water cooler!


Tim McCleskey, CEP, Equity Compensation Consultant
Stock & Option Solutions, Inc.
tmccleskey@sos-team.com
Tim McCleskey has been an Equity Compensation Consultant for Stock & Option Solutions, Inc. (SOS) since 2007. He also has been a Certified Equity Professional since 2007, volunteers for the Certified Equity Professional Institute, and has spoken at several equity events, including SOS and NCEO webcasts as well as the NASPP annual conference. He provides clients assistance with day-to-day stock administration, process documentation, Section 16 filings, proxy preparation, and quarterly financial reporting, including non-employee accounting. 


We've got an app for that! 
Work smarter, not harder with our new SOS DTA Balance Proof Application. Saving time has never been easier.

Free SOS Educational Webcast:
Defeat Disturbing and Dastardly Disclosures!



Please join us for our next educational webcast on
December 8, 2015 at 11am Pacific Time, 2pm Eastern Time.

Description:

Does the prospect of compiling your annual disclosures under ASC 718 make you feel defeated and deflated? Let our expert panel help you wrestle those rankling requirements to the ground!

This session will take you through the basic disclosure requirements of ASC 718, point out common errors (including disclosure that many companies perform in error), and show you easy ways to calculate any additional disclosures your system doesn’t provide. In addition we’ll show you how to audit system calculations for some troublesome disclosures (such as the terror-inspiring “vested and expected to vest”). 

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

 Join the SOS Team now.

Across Our Desk

Creative accounting: Interesting look at how companies are working around the cost of equity compensation in messaging to their investors.

A modest proposal from Dan Walter: Let’s get rid of ESPPs and ISOs (and voting for President).
myStockOptions.com new video on stock option taxation.

From the NASPP Blog: A new way to curb dilution, Social Security max unchanged for 2016, and a look at some scenes from the NASPP Conference – Part I, Part II.

Stock Options 2.0: Twitter CEO gives his own stock to employees;  meanwhile, Apple launches broad-based RSU program.

From the Wall Street Journal: Do workers want shares or cash?

We are excited for SOS’s own Achaessa James, who just started her own blog, Admin Super Powers.  Read the first two posts here: Stock option plan administration and Stock plan administration, Part 2 - vesting.
 

When is Aspirations?
There's a new meeting in town and you're going to want to attend. We are working on a new format for Aspirations, one that will give you a timely and relevant solid topic, networking, and something to snack on without taking up your whole day. 

Check back for updates in early 2016. An Aspirations Fling is coming soon. 

Want to get involved? Email
xtra@sos-team.com

SOS Xposé  

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

Working from a new desk… Lauren Downes is now working with Fitbit, Inc. as a Senior Stock Administrator. After taking Lending Club through an IPO, Debbie Tsoi-A-Sue has returned to Yahoo! as Finance Director, Global Stock Plan Services. Andrea Kagan is the Director, GSP, at Solium.

Write on…John Hammond of bendystraw llc has a newly released poetry collection, “your eyes are like limpid share pools”, which is a bizarre mix of stock plans and dark humor. Request a soft copy.

It’s a girl… Moe Zohny of Health Net and his wife, Brittany, are expecting a baby girl early next year.

A trip to remember… Bernice Toy of the NASPP took her father on his first trip to the Grand Canyon this month. See the pic
 
And the award goes to… Individual Achievement Awards from NASPP were given to Donna Spinola of McKesson Corporation, Thomas Welk from Cooley LLP, and Emily Cervino of Fidelity Stock Plan Services. Congratulations to you all!

SOS is hiring and here are our recent additions:
Diana Wickman (Outsourcing)
Bill Storey, CPA (Outsourcing)
Barbara Miller (People/Staffing Solutions)
Steve Rabin (People/Staffing Solutions)


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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.

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SOS Xtra Editor: Shawna Casey