SOS Educational Webcast: The Whole Enchilada: … be relied on as legal, accounting, auditing, or tax ... Q3 100% $750K (catch up expense to ... PSU/PSA Disclosures 24

Stock & Option Solutions, Inc. April 25, 2017

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SOS Educational Webcast: The Whole Enchilada: Accounting for PSUs from Top to Bottom

Bill Storey, CPA, Stock & Option Solutions, Inc.

Elizabeth Dodge, CEP, Equity Plan Solutions, LLC

Mike Esposito, CEP, Solium, Inc.

Disclaimer

• The following discussion and examples do not necessarily represent the official views of Stock & Option Solutions, Inc., Equity Plan Solutions, LLC, or Solium, Inc., with respect to any of the issues addressed. Moreover, this presentation and the views expressed by the individual presenters should not be relied on as legal, accounting, auditing, or tax advice. The outcome of any individual situation depends on the specific facts and circumstances in which the issue arises and on the interpretation of the relevant literature in effect at the time.

• Anyone viewing this presentation should not act upon this information without seeking professional counsel and/or input from their advisors.


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Materials Slides

http://www.sos-team.com/pdfs/accounting_for_PSUs.pdf

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Agenda

• Definition

• Overview of Types

• Accounting Attributes

• Attribution

• Tax Accounting

• Diluted EPS

• Disclosure

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http://www.sos-team.com/pdfs/accounting_for_PSUs.pdf


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Definition

• Equity Instrument + Performance Criteria

• Almost always includes time-based vesting too (must stay employed through X date)

• Could be Options, RSAs, SARs

• Most prevalent = Restricted Stock Units + Performance Criteria = PSU

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Recipes: Main Types of Performance Awards

Type Description Accounting Treatment

Market-based Metric is based on some variation of market price

• Monte Carlo Simulation used to create fair value on grant date

• Not adjusted• Failure to achieve goal = expense retained• Failure to meet service requirement =

expense reversed

Performance-based

Any metric NOT based on share price

• Fair Value = Market value on Grant Date• Expense adjusted each reporting period

based on Probable Payout• Cumulative catch up when you adjust

probable payout• Failure to meet service requirement =

expense reversed• Failure to achieve goal = expense reversed• If event-based, no expense until event occurs


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Examples of Metrics

• Market-based– Stock Price Closes above $30 for 30 consecutive

trading days.– Total Shareholder Return Exceeds 10% for 2017.– Peer Company Shareholder Return in top 20%.

• Performance-based– EPS exceeds $2 for 2017– Net income of $10B– Sales exceeds $10M– IPO– Merger closes by 10/31/17

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Attribution / Recognition

• Straight-line is only for service-based awards– ASC 718-10-35-8

– “An entity shall make a policy decision about whether to recognize compensation cost for an award with only service conditions that has a graded vesting schedule

• (a) on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards or

• (b) on a straight-line basis over the requisite service period for the entire award (that is, over the requisite service period of the last separately vesting portion of the award).”

– i.e., Performance awards = “Graded” attribution• Aka “accelerated” or “FIN 28” or “front-loading of expense”

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Service Inception Date

• Almost always = grant date

• NOT performance period begin date

– If grant date = 2/15/17 and performance period is 1/1/17 to 1/1/18

– Service inception date = 2/15/17

• MAY be AFTER grant date (more on this later) but almost never BEFORE grant date

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ASC 718 Definition of Service Inception DateASC 718-10-55-108 and 109• “This Topic distinguishes between service inception date and grant

date. The service inception date is the date at which the requisite service period begins. The service inception date usually is the grant date, but the service inception date precedes the grant date if:

– a) An award is authorized. (Compensation costs would not be recognized before receiving all necessary approvals unless approval is essentially a formality [or perfunctory].)

– b) Service begins before a mutual understanding of the key terms and conditions of a share-based payment award is reached.

– c)Either of the following conditions applies: • 1. The award’s terms do not include a substantive future requisite service

condition that exists at the grant date (see paragraph 718-10-55-113 for an example illustrating that condition) or

• 2. The award contains a market or performance condition that if not satisfied during the service period preceding the grant date and following the inception of the arrangement results in forfeiture of the award (see paragraph 718-10-55-114 for an example illustrating that condition).

• In certain circumstances the service inception date may begin after the grant date.”

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Translation ASC 718 Translation Common?

a) An award is authorized. Grant approved? Yes, for MOST grants.

b) Service begins before a mutual understanding of the key terms and conditions of a share-based payment award is reached.

Service began before grant date.

Yes, for many grants. (Performance period pre-dates grant date for many performance awards.)

c) Either of the following conditions applies:

1. Award’s terms do not include a future service condition OR

No future vesting. NOT common! (Never seen it.)

2. Award contains market or performance condition that if not met during the service period preceding the grant date and following the inception of the arrangement results in forfeiture of the award.

Condition met between performance period begin date and grant date.

NOT common! (Never seen it.)

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Delayed Service Inception Date

• Awards with Multiple Performance Periods– Performance periods may have distinct service

inception dates and thus separate requisite service periods

• (i.e. Award granted Feb. 15, 2017 with Annual Revenue or EBITDA Metrics for FY 2017-2019… each year has a service inception date of January 1st)

• Goals must be independent, NOT based on % increase from prior period or similar

– Grant Date Fair Value is measured on the grant date, but compensation expense is attributed separately over each performance period.

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Attribution / Recognition

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Straight-line Graded

$33

$33

$34

$33

$33

$34

Delayed Service Inception Date

$33

$33

$34

Accounting Example – Market-based

• 100,000 target shares granted on 1/1/17 when stock price is $10• Vesting on 1/1/18, after certification of achievement• Goal

• Monte Carlo Simulation sets Fair Value at $11 on grant date– If payout % exceeds 100% or goals set during performance period, fair

value will sometimes exceed market value• Can also occur if grant date much later than performance period begin date

• $1.1M (target shares * fair value) recognized from 1/1/17 to 1/1/18• Failure to meet goal = expense retained• Employee terminates before 1/1/18, expense reversed

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Accounting Example – Performance-based

• 100,000 target shares granted on 1/1/17 when stock price is $10

• Vesting on 1/1/18, after certification of achievement

• Fair Value = $10 on grant date

• $1M (target shares * fair value) total fair value

• If target not achieved, expense reversed

• If participant terminates before 1/1/18, expense reversed

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Accounting Example – Performance-based (continued)

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Qtr Probable Payout Estimate

Expense Booked

Q1 75% $187.5K (25% service period * 75% probable payout)

Q2 0% -$187.5K (Reverse previously booked expense when probable payout changes to 0%)

Q3 100% $750K (catch up expense to 75% of service period, 100% of expense)

Q4 150% $750K (catch up expense to full service period and new probable payout)


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Tax Accounting

• Refresher:– Deferred Tax Asset (DTA) booked for non-qualified

stock grants• Anticipates future tax deduction

– = expense accrued * corporate tax rate

– As grants are settled (exercised, released, expired), DTA is released

• Tax deduction has occurred, anticipation no longer needed

– If you are in Net Operating Loss (NOL), DTA may (or may not) be booked

• If booked, generally offset by a full (or partial) valuation allowance

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Tax Accounting

• Tax Accounting for Performance Grants:– Market-based

• No fluctuations – DTA “follows” expense• When shares released/canceled – ensure that DTA release

matches expense booked• If grants are cancelled due to failure to achieve goals, no

reversal of expense = deficiency – DTA Booked, expense retained – just like an option expiration

– Performance-based• DTA “follows” expense – marked up, marked down• When shares released/canceled – ensure that DTA release

matches expense booked• If grants are cancelled due to failure to achieve goals,

expense reversed = NO deficiency

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Diluted Earnings Per Share (EPS)

Rules of Thumb for Performance/Market-based Awards & Diluted EPS:

• Performance awards are “contingently issuable shares” for purposes of Diluted EPS Calcs. a.k.a. Could be issued…

• Do NOT include performance/market-based awards in Diluted EPS until the performance or market condition criteria is Actually met.

• Assume that the end of the reporting period is the end of the performance period. Is the criteria met or not?

• Being ahead of schedule or on pace to achieve the performance or market condition criteria is NOT a sufficient basis to include performance/market-based awards in Diluted EPS.

• Performance conditions like IPOs or change in controls events. Triggering event MUST occur first**

Sources: FASB ASC 260-10-45-31 thru 32FASB ASC 805-20-55-50 thru 51 (principle)**

Diluted Earnings Per Share (EPS) Cont..

• Most common method:

– Treasury Stock Method (ASC 260-10-45-29)- Determine Dilutive Shares After W. Avg. Impact of Buy Back Shares based on 3 buckets:

1) Option Exercise Proceeds, if any

2) Average Unamortized Compensation cost

3) Amount of Excess Tax Benefits**

W. Avg. Shares O/S less Buy Back Shares = Dilutive or Anti-Dilutive

Example (Adopting ASU 2016-09):

** Removed from Diluted EPS Calcs by FASB ASU 2016-0920

Grant Type

Perf./ Market Criteria Met?

W. Avg. Shares

O/SBuy Back

Shares

Impact on

Dilutive Shares

DilutiveShares

Anti-DilutiveShares

A PSU YES 100 20 20 80 0

B TSRSU NO 100 0 0 0 Not Incl.

C PSU YES 100 150 0 0 100


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Disclosures

• Disclose performance awards separately from time-based

• Required Disclosures differ based on underlying award type

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ASC 718-10-50-2(g)

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Required Disclosures

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*Screenshot from ASC 718-10-55-136


PSU/PSA Disclosures

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Sample PSU Disclosures

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Disclosures from Macy’s Inc 10-K, year ended 1/28/17:https://www.sec.gov/Archives/edgar/data/794367/000079436717000041/m-0128201710k.htm

Sample PSU Disclosures

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Disclosures from TJX Inc 10-K, year ended 1/28/17:https://www.sec.gov/Archives/edgar/data/109198/000119312517099642/d269088d10k.htm

https://www.sec.gov/Archives/edgar/data/794367/000079436717000041/m-0128201710k.htm

https://www.sec.gov/Archives/edgar/data/109198/000119312517099642/d269088d10k.htm


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Sample PSU Disclosures – Vesting on IPO

• “We issue RSUs to employees and directors. The employee RSUs under the 2008 Plan have two vesting conditions: (1) a service condition and (2) a liquidity condition which is considered a performance-based condition. For new employee grants, the RSUs generally meet the service condition over a four-year period, with 25% meeting after one year and then ratably on a quarterly basis for the remaining three years. For continuing employee grants, the RSUs generally meet the service condition pro-rata quarterly over the four-year period (without a one-year cliff). In the event of a liquidity event such as an IPO of our common stock, a change in control, or certain qualifying secondary liquidity transactions, as defined by the board of directors and within the time period determined by the board of directors, and the employee remains employed with us upon the occurrence of the event or six months following the effective date of an IPO, the RSUs will be settled in shares of our common stock to the extent the service condition has been met. Upon the satisfaction of both vesting conditions, the RSUs entitle the holder to one share of common stock for each unit of restricted stock. The total fair value of RSUs vested during the years ended January 31, 2016 and 2017 was $XX million and $YY million, respectively.”

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Contact Information

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Bill Storey, CPAManager, Outsourcing ServicesPhone: (408) [email protected]

Elizabeth Dodge, CEPPrincipalBus: [email protected]

Michael Esposito, CEPFinancial Reporting Consultant & Product ManagerPhone: [email protected]

mailto:[email protected]




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ASC 718 Glossary

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Performance ConditionSource: ASC 718-10-20

A condition affecting the vesting, exercisability, exercise price, or other pertinent factors used in determining the fair value of an award that relates to both of the following:

a) An employee’s rendering service for a specified (either explicitly or implicitly) period of time

b) Achieving a specified performance target that is defined solely by reference to the employer’s own operations (or activities).

Accounting Treatment = Expense FLUCTUATES based on Management’s assessment of performance criteria. Fair value does not include the impact of the performance condition. Triggers variable accounting, which creates volatility in the P&L


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Market ConditionSource: ASC 718-10-20

• A condition affecting the exercise price, exercisability, or other pertinent factors used in determining the fair value of an award under a share-based payment arrangement that relates to the achievement of either of the following:

a) A specified price of the issuer’s shares or a specified amount of intrinsic value indexed solely to the issuer’s shares

b) A specified price of the issuer’s shares in terms of a similar (or index of similar) equity security (securities). The term similar as used in this definition refers to an equity security of another entity that has the same type of residual rights. For example, common stock of one entity generally would be similar to the common stock of another entity for this purpose.

Accounting Treatment = Expense is FIXED whether performance criteria is met or not. Fair value includes the impact of market condition. Expense is reversed only if service requirement is not met (i.e., termination).

Diluted EPS: Treasury Stock Method

• ASC 260-10-45-23– Exercise of options and warrants shall be assumed

at the beginning of the period and common shares shall be assumed issued

– Proceeds from exercise shall be assumed to be used to purchase common stock at the average market price during the period (a.k.a. “Buyback Shares”)

– The incremental shares (the difference between the number of shares assumed issued and the number of shares assumed purchased a.k.a. “Buyback Shares”) shall be included in the denominator of the diluted EPS computation

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Diluted EPS: Treasury Stock Method (Cont.)

• ASC 260-10-45-31

– Awards with a market condition, a performance condition, or any combination thereof (as defined in Topic 718) shall be included in diluted EPS pursuant to the contingent share provisions in paragraphs 260-10-45-48 through 45-57.

– See the Rules of Thumb on an earlier slide

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Option Disclosures

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Sample Perf Option Disclosures

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Disclosures from Dell Technology, Inc 10-K, year ended 2/3/17:https://www.sec.gov/Archives/edgar/data/1571996/000157199617000004/delltechnologiesfy1710k.htm

https://www.sec.gov/Archives/edgar/data/1571996/000157199617000004/delltechnologiesfy1710k.htm

Documents

SOS Educational Webcast: The Whole Enchilada: … be relied on as legal, accounting, auditing, or tax ... Q3 100% $750K (catch up expense to ... PSU/PSA Disclosures 24