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
Subscribe to Xtra!
Request a call from an SOS Team Member to get answers to your questions and further discuss your needs-click here
From the SOS Library:
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
On our webpage
Share your story...
Because we value your feedback, we would love to hear about your experience working with SOS. Share now.
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.
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.
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.