Whitepapers
Accounting for Deferred Taxes on Equity Compensation Awards
2010This white paper, originally published in 2005 and updated in 2010, provides a detailed description of the deferred tax accounting associated with share-based compensation awards. A review of both basic deferred tax reporting requirements and advanced topics is included. Furthermore, effort is made to discuss not only the mechanics of deferred tax accounting for share-based compensation awards, but also the theoretical issues driving those mechanics.
Introduction to Expected Term
2010While companies have the flexibility to choose between lattice models and the Black-Scholes-Merton (BSM) formula, or any other model that incorporates the required inputs, this liberalism often overshadows the reality that both SFAS 123(R) and SAB 107 call for substantial rigor in estimating model inputs. This white paper reviews the difficulties confounding the expected term calculation, and the best practice techniques that support the estimation of a reliable value.
Expense Recognition for Market and Performance Awards
2010As compensation consultants work with management and boards to design targets that can presumably link compensation to the creation of shareholder value, a preponderance of different instrument designs has entered the mainstream. This white paper focuses on the advanced accounting implications of performance-based equity awards in order to equip issuing companies with the expertise needed to handle such awards if and when they are issued.
Introduction to IFRS 2
2010This white paper provides a general introduction to IFRS, focusing on both the high-level characteristics of the framework and the short-term, tactical issues that US-based multinational companies should be considering. In addition, the paper reviews the key differences relative to ASC 718 and how companies are tackling these differences. It concludes with practical recommendations companies should consider with regard to both short-term and long-term concerns.
Underwater Option Exchanges: Baseline Theory and Implementation Approaches
2010As companies’ options continue to sink farther underwater, questions abound regarding the repercussions in terms of employee incentive, motivation and retention. As a result, some companies are considering exchanging underwater options for an equivalent dollar value of at-the-money stock options (or potentially even less underwater stock options) or restricted stock. This white paper provides insights on why companies may choose to exchange underwater options for at-the-money stock options or restricted stock and the related implementation requirements.
Introduction to Equity Award Valuation Models
2010This white paper provides an introduction to the central valuation framework and how both the BSM formula and lattice models fit into it, including a review of the models’ key theoretical underpinnings and the subtle ways in which they differ. It also synthesizes the current state of affairs, in which a majority of companies use the BSM formula to value employee stock options, and discusses where best practices are heading and why current best practices ended up where they did.
Introduction to Volatility Estimation
2010This white paper focuses on the challenges and best practices related to estimating volatility in a manner that is compliant with ASC 718 and SAB No. 107. Ultimately, volatility estimation techniques are data-driven, but they require both qualitative and quantitative judgment calls, which are performed only through careful consideration of all the available facts and data. Although a variety of methods are available, some are clearly more appropriate for given situations than others. Furthermore, tradeoffs often arise in seeking to comply with both the spirit and letter of financial reporting requirements.
Exchanging Underwater Stock Options
2009This paper, which was published by The Corporate Board, discusses the economic factors driving stock option exchanges for companies that want to re-establish broken incentives and retention benefits. It also reviews the questions companies must consider before proceeding with an exchange, as well as the key requirements for valuing and exchanging an underwater option.
Underwater Option Exchanges: Financial Reporting Challenges
2009This white paper reviews the financial reporting challenges associated with an underwater option exchange. These challenges include, but are not limited to, extensions to the vesting schedule and the treatment of incremental cost resulting from the modification. These challenges pose not only theoretical accounting questions but also systems difficulties. While the financial reporting implications of an option exchange should not dictate how the exchange is structured, the implications should be well understood upfront and a process should be established for handling them.
Underwater Option Exchanges: Tender Offer Data Results
2009This presentation reviews tender offer results collected by Equity Methods for all known tender offers filed between 2005 and September 30, 2009. The presentation provides summary analyses and trends from our internal database. Numerous companies of all sizes and across all industries have implemented option exchange programs, with a considerable uptick in 2009. While these programs are not appropriate for all companies, under the right circumstances they can provide a vehicle for restoring broken incentives. No two programs are alike, and the correct design and execution of an exchange program differs from case to case. Based on our experience, the most successful programs are those in which deliberate case-specific analysis and planning were performed well in advance of the decision to actually obtain shareholder approval.
Underwater Option Exchanges: ASC 718 Compliant Valuation Methods for Options Subject to an Exchange Transaction
1996This white paper focuses on the correct valuation science to apply in measuring whether an exchange produces incremental cost, and is relevant to issuing companies, external auditors and regulators. Research conducted by Equity Methods suggests that standard Black-Scholes-based valuation approaches, when applied to underwater stock options subject to an exchange, yield material measurement errors; lattice models, when correctly fitted to a company’s historical data, virtually eliminate these errors. These findings are relevant to the accuracy not only of the financial statement values recognized as a result of an exchange, but also the promises made to shareholders regarding the cost and nature of the exchange for which their approval is solicited.
NCEO Issue Brief: Volatility and Fair Value Estimates for Stock Options in a Changed Market
1996This paper, published as an Issue Brief by the National Center for Employee Ownership (NCEO), covers the issues companies should consider when analyzing their volatility estimation methodology. Brief introductions are provided on the topics of volatility estimation in general and the challenges associated with estimating long-term volatilities (as required for valuing employee options under ASC 718. The crux of this paper focuses on standard estimation methodologies currently in use and alternative best practices that have emerged.
Useful Links
- Leverage the following resources to learn more about equity compensation and the ASC 718 and IFRS 2 standards.
- ASC 718 Standard
- IFRS 2 Standard
- Financial Accounting Standards Board (FASB)
- International Accounting Standards Board (IASB)
- Certified Equity Professional Institute
- National Center For Employee Ownership (NCEO)
- National Association for Stock Plan Professionals (NASPP)
- Financial Executives International (FEI)
Recommended Books
Advanced Topics in Equity Compensation Accounting
By Takis Makridis
In this required text for the CEP, published by the NCEO, author Takis Makridis selects a handful of valuation issues, one reporting issue and a hybrid of the above and subjects them to close scrutiny.
Click here to purchase a copy
