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Four Fundamentals of Financial Reporting for Equity Compensation

Four Fundamentals of Financial Reporting for Equity Compensation. Kathy Biddle, CEP. September 2014. Best Practices. Make accounting treatment a part of the plan design Build in process efficiencies Well structured internal controls Prepare your team. Reporting Burden.

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Four Fundamentals of Financial Reporting for Equity Compensation

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  1. Four Fundamentals of Financial Reporting for Equity Compensation Kathy Biddle, CEP September 2014

  2. Best Practices Make accounting treatment a part of the plan design Build in process efficiencies Well structured internal controls Prepare your team

  3. Reporting Burden Regulatory requirements Accounting rules Subjective assessments Short timeframes

  4. 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

  5. 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, stock-price performance • Performance or Market-based valuation?

  6. 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

  7. Automation vs. Manual Process Spreadsheet • Time consuming to update • Higher error rate • ISO 100K calculation errors • Missed data elements Available automation choices

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. Accounting Hazards Employee vs. Non- Employee • NE - Mark to Market revaluing • EE – Fixed Accounting Performance Awards • Performance vs. Market based • Managing expectations Retirement Eligibility

  18. 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

  19. 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

  20. Questions Kathy Biddle, CEP, ECU Financial Reporting Specialist kathy.biddle@easiadmin.com Office (925) 730-4329 Equity Administration Solutions, Inc. Thank you for your time today

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