Certified Equity Professional Institute

Transcription

1 Exam Overview Webinars Certified Equity Professional Institute L1 Exam Overview Webinar Accounting The information presented herein is of a general nature and has been simplified for presentation to a large audience. It is not a complete discussion of all aspects the laws, rules, regulations, standards, and principles that govern equity compensation plans. The contents are neither designed nor intended to be relied upon, and should not be considered, as legal, tax or accounting advice. Your specific situation may involve circumstances that cause the laws, rules, regulations, standards and principles described herein to apply differently. You should consult your own advisors before deciding what, if any, course of action to take in your own particular situation.

2 Accounting Overview 12% of the Exam General Definitions and Concepts Accounting Standards Accounting Standards Codification 718 or ASC 718 (formerly Statement of Financial Accounting Standard 123 (Revised) or FAS123R) Compensation cost Valuation factors Awards to Non-employees ESPP -2-

3 History Where do accounting standards come from? Securities and Exchange Commission SEC Financial Accounting Standards Board FASB Generally Accepted Accounting Principles GAAP (US) Statement of Accounting Financial Standards SFAS Emerging Issues Task Force EITF FASB Interpretations FIN (FASB Interpretation Number) Staff Technical Bulletins STB Staff Accounting Bulletins SAB FASB's Codification Project International Accounting Standard Board IASB International Financial Reporting Interpretations Committee (IFRIC) IASB s interpretative body Member Nations Mostly European Union plus Australia, Canada, Russia, Turkey, and Singapore -3-

4 Basics Terminology Compensation income for tax purposes Compensation expense or cost for accounting purposes Accounting standards ASC 718 (formerly SFAS No. 123 (Revised) (FAS 123R)) IFRS 2-4-

5 Measurement Awards to employees Measurement date Equity Awards: Date of grant Liability Awards: Date of settlement (payout, exercise, or expiration) Equity Awards Awards paid out in stock Terms of arrangement are mutually understood Grant is authorized Price is set Grant is communicated to employee Award is unilateral cannot be negotiated Communicated within relatively short period of time Liability Awards Awards paid out in cash Settlement date (payout/exercise/expiration) -5-

6 Fair Value Compensation expense is equal to the fair value Compensation expense is determined on measurement date Expense is equal to the fair value on the measurement date Expense is not adjusted for changes in fair value and model inputs Fair value is not necessarily the same as FMV FMV is generally closing or average trading price Fair value for stock options is determined using an option-pricing model Black-Scholes Lattice model Other Restricted Stock Awards / Restricted Stock Units Fair value = generally FMV (less any amount paid for stock, if applicable) Expense is accrued over requisite service period Typically the vesting schedule -6-

7 Valuation Models Option pricing model must consider six variables Expected life (term) Longer expected life = higher fair value Period that option is expected to be outstanding Grant date to expected exercise/expiration/cancellation Expected volatility Higher volatility = higher fair value Measurement of how much stock price is expected to fluctuate over the expected life of the option May be based on: Company s own historical volatility Implied volatility (volatility associated with exchange-traded options on company s stock) Historical or implied volatility of peer companies Private companies without an internal market for their shares generally use peer company volatility or industry indices -7-

8 Valuation Models Option pricing model must consider six variables Expected volatility (cont ) Private companies generally must base expected volatility estimate on volatility of publicly held peer companies Exercise price Higher exercise price = lower fair value Current price of underlying stock (FMV) Higher FMV = higher fair value The exercise price and FMV work together to impact the fair value; the greater the spread between these two values, the higher the fair value will be Expected dividend yield Higher dividend yield = lower fair value Risk-free interest rate Higher interest rate = higher fair value Generally equal to treasury rates -8-

9 Recognition Recognition of compensation cost/expense Recorded over the service period Vesting period unless clear evidence to the contrary Explicit service period Stated vesting period, generally begins on grant date, ends on vest date Implicit service period Period in which performance goal is expected to be achieved Applies to performance awards only -9-

10 Accrual Recognition of compensation cost/expense Accrual Approaches Cliff Vesting Straight-line accrual used Evenly over the service period Graded Vesting Choice of approaches Straight-line Accelerated -10-

11 Straight-Line vs. Accelerated Attribution Award valued at $100,000 that vests in two annual increments. Straight-line Accrual: Year 1 Year 2 Total $50,000 $50,000 $100,000 Accelerated Accrual: Each vesting tranche is treated as a separate award Year 1 Year 2 Total Tranche 1 $50,000 $50,000 Tranche 2 $25,000 $25,000 $50,000 Total $75,000 $25,000 $100,

12 Accrual Recognition of compensation cost/expense Forfeitures Expense is only recognized for awards that vest Once an award vests, expense cannot be reversed, even in the case of an option that expires unexercised If award is forfeited (due to termination) before vest, then expense for unvested shares is reversed Expense is recorded based on an estimate of expected forfeitures Estimate is trued up to actual outcome as service period elapses -12-

13 Non-employee grants ASC 718 not applicable to non-employees Employee status is determined based on definition of employee in US tax code W-2 vs MISC Except non-employee directors ASC Subtopic Equity-Based Payments to Non- Employees (formerly EITF 96-18) Fair Value on date services or performance is complete Measurement date is vest date Marked-to-market fair value until measurement date Expected term is contractual life of grant Expense recognized over service period, typically the vesting period -13-

14 ESPP Non-compensatory if: Discount not greater than cost of raising capital (5% safe harbor) No look-back or other option-like features Substantially all employees allowed to participate on equal basis No expense is recognized for non-compensatory plans Also referred to as safe harbor plans -14-

15 ESPP If compensatory, treated as a stock option Offering begin date is grant date Purchase date is both vest and exercise date Fair value can include up to three components: Discount at offering begin date Value of look-back: Proportionate value of at-the-money call option granted on enrollment date Value of additional shares: Proportionate value of at-the-money put option granted on enrollment date Attribution Fair value of each purchase period is computed separately Expected term is measured from beginning of offering to purchase date Expense is recorded over offering period Straight-line attribution is permissible under ASC 718 Total expense is estimated based on contribution levels -15-

16 Educational Courses to Assist In Exam Preparation NASPP NCEO Although the CEP Institute makes this information available to candidates, we do not endorse educational programs. The candidate must determine whether the program is suitable for his/her needs. -16-