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Four Fundamentals of Financial
Reporting for Equity Compensation
Kathy Biddle, CEP
September 2014
© 2014 Equity Administration Solutions, Inc. All rights reserved.
Best Practices
 Make accounting treatment a part
of the plan design
 Build in process efficiencies
 Well structured internal controls
 Prepare your team
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Reporting Burden
 Regulatory requirements
 Accounting rules
 Subjective assessments
 Short timeframes
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Successful Plan Design
 Involve Accountants in design
phase
• Agree on interpretations BEFORE
implementation
• Determine financial and tax accounting
implications – not just the compensation
cost
• Create and run scenarios
• Test impact of various conditions and
outcomes
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Accounting Treatment – Part of Plan Design
 Restricted or Option based?
 Settled in stock or cash?
 Time only, performance only, or
combination of time and performance?
 Measurement date and service period?
 Performance Metrics – Financial
performance, strategic milestones, stockprice performance
• Performance or Market-based valuation?
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Build in Process Efficiencies
 Quarter-End and Year-End Challenge
 More information in even shorter
timeframes
 Race to file the 10Q
 Process must be
• Structured, defensible, efficient and
repeatable
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Automation vs. Manual Process
 Spreadsheet
•
•
•
•
Time consuming to update
Higher error rate
ISO 100K calculation errors
Missed data elements
 Available automation choices
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Outsource the Process/Calculations
 Advantages
• Saves time internally
• Expertise of resource contracted
 Disadvantages
• May be difficult to predict future cost
• Sustainability
• Increased vendor risk assessment
requirements
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Build a Custom Software Solution
 Advantages
Addresses specialized business needs
• Innovation may result in competitive
advantage
•
 Disadvantages
• Significantly higher initial cost
• Necessitates working with development
team
• On-going maintenance costs
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Software Installed On-Site
 Advantages
• Sometimes lower initial cost
• Vendor risk is limited to the functionality –
hosting is your own environment
 Disadvantages
• May be difficult to predict future cost
• Transition to new version is burden for
stock admin team and IT
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Software as a Service
 Advantages
• Less demand from IT
• More accessible for mobile or remote
users
 Disadvantages
• Less control over software version
• Increased vendor risk assessment
requirements
• May increase data privacy requirements
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Well Structured Controls
 IT/Technology Issues
• Capture data accurately, ensure
appropriate segregation of duties
• Be sure controls for post dated
transactions are adequate
• Data Security
 Grants
• Ensure the terms of the award are correct
and that it meets plan requirements
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Well Structured Controls
 Vesting/Exercise
• Verify that the participants are eligible
• Ensure that shares are released accurately
and promptly to participants or broker
 Tax and Payroll
• Determine the proper FMV for all
transactions
• Ensure the correct amounts were
calculated for income and tax withholding
• Confirm that IRS reporting and payment
requirements have been met
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Well Structured Controls
 Accounting
• Verify calculations and reports for
accuracy, completeness and validity
• Ensure well documented procedures are in
place
 Legal
• Confirm that underlying shares are
properly registered
• File SEC Forms 3, 4 and 5 timely when
required
• Design and control your blackout periods
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Well Structured Controls
 Application of Forfeiture Rates
• Establish policy for application of forfeiture
rate
• Static vs. Dynamic forfeiture
• Review current forfeiture rate and adjust
over the service period
• Establish policy to handle back dated
transactions
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Accounting Hazards
 Excess withholding
• Allowing participants to choose withholding
rates can trigger liability accounting for
awards
• ASC 718-10-25-18 and 718-10-25-19
• Set the standard for all situations and don’t
waiver under pressure
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Accounting Hazards
 Employee vs. Non- Employee
• NE - Mark to Market revaluing
• EE – Fixed Accounting
 Performance Awards
• Performance vs. Market based
• Managing expectations
 Retirement Eligibility
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Modifications
 Consult with Accounting for certain events
• Determine treatment before data is changed
 Events that generally trigger modification
accounting
•
•
•
•
Option Exchanges
Equity restructuring
Acquisitions
Other changes to original terms:
• extension of exercise grace period
• acceleration of vesting
• allowing employee to retain options post
termination
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Modifications
 Events that generally do not trigger
modification accounting
• Stock Split/Spinoff/Equity restructuring with
an anti-dilution provision in plan
• Acceleration of vesting unrelated to
termination
• Additional features such as permissible
exercise methods or name changes
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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Questions
Thank you for
your time today
Kathy Biddle, CEP, ECU
Financial Reporting Specialist
kathy.biddle@easiadmin.com
Office (925) 730-4329
Equity Administration Solutions, Inc.
© 2014 Equity Administration Solutions, Inc. All rights reserved.
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