The Equity Methods Mailbag—Q4 2025

Each year, our team engages with hundreds of companies and fields thousands of questions, ranging from inquiries about stock-based compensation foundations to more complex, organization-specific questions. Many of these strike a healthy balance: they’re nuanced enough to spark deeper thinking, yet broad enough to resonate across multiple industries.

That’s the spirit behind the Equity Methods Mailbag. We share real questions from clients and colleagues—refined for clarity, brevity, and anonymity—with insights that we hope will be both practical and thought-provoking.

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Our CEO retired earlier this year, and we modified her equity awards upon departure. Her options will retain the full remaining term rather than expire 90 days post-termination, and we accelerated any tranches scheduled to vest in the next 12 months. How should these changes be reflected in the proxy tables?

– Director, Executive Compensation, consumer packaged goods industry

Modifying equity awards to executives has all the complexity of the ASC 718 modification framework, plus special reporting considerations for the financial statements and proxy.

In the CEO retirement case, we have two distinct modifications. First, extending the post-termination exercise window for vested options is a Type I modification (probable-to-probable), because the options are vested. Second, accelerating the next 12 months of unvested tranches is a Type III modification (improbable-to-probable), because the tranches would have forfeited absent the modification. While the accounting framework in ASC 718 differs between Type I and Type III modifications, the focus for both in the proxy is the incremental fair value created on the modification date.

In the Summary Compensation Table, the incremental fair value resulting from both changes is included in the year of modification in the respective Option Awards and Stock Awards columns. Item 402 takes this approach because modifications are viewed as new compensation decisions. Prior-year amounts are not revisited. Instead, a footnote typically clarifies that the values disclosed include amounts related to modifications of previously granted awards.

The Grants of Plan-Based Awards Table follows a similar pattern. Material modifications are displayed as a separate line item with a grant date equal to the modification date, and the incremental fair value reported in column (I). This presentation preserves the integrity of historical disclosures while clearly identifying the impact of the new compensation decision.

The remaining tables then reflect the awards’ updated terms. The Outstanding Equity Awards table displays the revised expiration date for the extended options. Accelerated stock awards are included in the Stock Vested and Option Exercises table since the accelerated vesting is in the year, and accelerated option awards would appear in the table to the extent any were also exercised in the year. The Potential Payments Upon Termination table captures any additional potential payments following the modification.

As a final consideration, companies must ensure consistency between the proxy and the 10-K when describing the nature and impact of the modification. For more information on modifying awards to extend exercise windows and accelerate vesting, see Questions E1–E2 of our Modifications & Discretion FAQ. Further, our in-depth Modifications White Paper explores the economic theory and mechanics of these and other modification types.

Our new CFO joined the team in October, and he received the same PSUs that the rest of the leadership team received earlier this year. For the TSR award, should we run an updated Monte Carlo valuation, or can we use the same valuation from the original grants?

– Director, Financial Reporting, health care industry

We run into this all the time across our clients. Technically speaking, ASC 718 calls for a new valuation for any grant made on a separate date, even if the terms are the same as a prior grant. In practice, we see some variation in approach based on materiality, where some companies use the value factor (fair value as a percentage of the grant price) from the prior grant and apply it to the new grant price.

Many companies always follow the GAAP and update the fair value for each grant. For those who wish to consider alternatives, it’s important both to consider the factors that drive materially different valuation results, and to weigh the materiality to proxy disclosures for individual executives, not just the company’s overall financials.

In this case, the grant was made to a CFO, who is a named executive officer (NEO) in the proxy disclosures. That fact alone typically warrants updating the valuation. Even if the accounting impact seems minor and is not material to the financial statements, the individual grant’s fair value is disclosed in the proxy statement and is likely material to that individual’s disclosure.

Beyond the recipient, several other factors can help guide the analysis:

Passage of time. If the new grant is made only days after the original awards, the valuation inputs are unlikely to have changed significantly. As more time passes, especially beyond a month or two, the underlying assumptions can diverge enough that most auditors would expect an updated valuation.

Stock price movement. For TSR awards, the primary driver of fair value is how the company’s stock has performed relative to peers from the performance start date to the grant date, known as realized returns. Because the Monte Carlo valuation is highly sensitive to these realized returns, even moderate market shifts can move the fair value meaningfully. Tracking relative performance via AwardTraq to have a performance snapshot at your fingertips can be instrumental in understanding how your price has moved relative to peers over time.

Size of the grant. The materiality of the award itself is also important. For a small, off-cycle grant to a mid-level employee, reusing the prior valuation may be reasonable. For a larger grant, imprecision in valuation will have a correspondingly large dollar impact.

Bottom line. While the decision to refresh a Monte Carlo valuation can involve judgment, the combination of factors in this scenario strongly supports updating the model. The grant is for a named executive officer; the timing is several months after the original awards, and a new-hire CFO grant is likely substantial in size. Running a new Monte Carlo valuation provides a defensible, transparent, and accurate reflection of the award’s fair value for both accounting purposes and proxy disclosure.

We’ve been having challenges with the administrative burden around annual grant releases. Grant dates are based on board meeting dates that vary slightly from year to year, and vest dates are based on grant dates, so we end up with four massive release events back-to-back. Can we align the grant dates in spite of varying board meeting dates, or at least align vest dates?

– Senior Manager, Executive and Equity Compensation, banking industry

Varying vest dates is a common pain point we’ve observed for stock administration teams. Even when companies devote significant time and resources to planning the annual grant, the post-grant administration can become mired in unexpected (and even unnecessary) complexity.

As a result, it’s common for stock administration teams to find themselves spread dangerously thin around release time as they calculate and recalculate the associated taxes, prepare withholding forms, and integrate their work across the disparate payroll, brokerage, and accounting systems. For everyone involved, the time commitment compounds with each vesting date throughout the month, as the entire process restarts with every major release.

In these cases, trying to align grant dates is a tempting solution. If grant dates are aligned on a specific date, then in future years, tranches will always be released only on that one day, and administration processes can be batched and simplified.

Unfortunately, this approach is not always as simple as it sounds. The guidance in ASC 718 includes specific criteria for an accounting grant date under ASC 718:

1. There is a mutual understanding of the award’s key terms and conditions.
2. The recipient begins to benefit or be adversely affected by changes in the price of the underlying shares.
3. Awards are made under an arrangement approved by shareholders, or approval is considered a mere formality.
4. The key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short period from the date of approval.
5. The recipient meets the broad definition of an employee and has begun providing service.

In most cases, all conditions are met once the award is approved. For accounting and disclosure purposes, this means that the grant date often cannot be arbitrarily set at a later date for alignment across years. Another consideration is maintaining flexibility to avoid granting near releases of material non-public information and comply with SAB 120 and Item 402(x).

Because synchronizing grant timing can be difficult in practice, we instead recommend tackling the problem from the other end of the award. Share releases occur on an award’s vest dates, and there’s no requirement that these align perfectly with grant date anniversaries. If we allow the grant date to fall where it may, we can still elegantly sync all future releases to the same date by scheduling them to vest on our consistent target date instead.

Implementing this approach must still consider other requirements in the stock plan, such as having at least one year before an award’s first vest. Additionally, off-the-shelf stock systems may require extra steps to create the custom vesting schedule each year (i.e., vest dates that don’t exactly build off the grant date). However, making the upfront administrative investment to solve for these issues means permanent relief for share releases, without limiting your grant date constraints.

Our general counsel is leaving the company. Her last day in the GC role was September 30, but she’s technically an employee through the end of the year. However, she’s really just on call to aid in the transition. Consistent with her employment agreement, her equity will continue to vest pro rata based on service provided, with part of the awards forfeiting and part remaining outstanding. How do we account for all of this?

– Assistant Controller, software industry

There are a handful of distinct issues in play that need to be considered separately.

The first is a question of the amount of expense. Here, the key question is to determine if the GC’s departure results in a modification. Since the outlined treatment of the awards is in line with the pre-existing employment agreement, this would not be a modification under ASC 718. Thus, there’s no remeasurement needed, and the grant-date fair value is still the basis for expense.

Determining the total amount of expense is then relatively simple. We simply determine which awards are going to vest based on the pro rata calculation. For shares that we determine will ultimately forfeit, the expense is reversed. For shares that will vest according to the employment agreement, expense will be recognized at the original grant-date value per share.

The second question involves the timing of expense recognition. From the description of the transition arrangement, it appears that there is no substantive service being rendered.

Thus, expense for the portion of the awards that will ultimately vest should be accelerated on September 30, regardless of their legal vesting schedule. Even if proration is based on a 12/31 employment termination date based on legal agreements, the expense still accelerates to 9/30 because there is no further service being provided. This is a fairly typical fact pattern and a common place for legal and accounting interpretations to naturally diverge.

Another timing question is when to reflect the reversal of expense for the forfeiture. Often, companies won’t forfeit shares until the actual vest or release date, which raises the question of what to do until then. What if the departure is known in Q3 2025? Pragmatically, it’s not uncommon to wait for the forfeiture to flow through in the future and take the reversal at that time. But when it’s material, the more technically sound approach that companies often take is to override the expense process in order to take the reversal when the departure becomes known. It’s then important to unwind this override when the actual cancellation flows through to avoid double-counting.

In sum, this situation boils down to a simple answer—simply accelerate existing expense on what will vest, and reverse expense on what won’t vest—though it takes a winding path to get there.

We just announced that we’ll be paying a dividend for the first time starting in Q1. Our RSU agreements didn’t include a provision allowing recipients to participate in dividends, so we’re modifying the agreements to include the accrual of dividends. What are the implications of this modification?

– Controller, technology hardware industry

First-time dividend issuances pose significant accounting and stock administration challenges. Oftentimes, equity plan documents are silent about what happens if a dividend were initiated. Without clear language, the default assumption is likely that outstanding awards do not participate in dividends. This is supported by the company modifying terms to allow for DEUs.

Under the modification framework in ASC 718, this would be a Type I modification because vesting in the underlying shares is probable before and after the modification. The per-share incremental cost is equal to the present value of dividends expected to accrue over the remaining vesting period, as participants would not otherwise have received them. The two common methods for calculating the impact are (1) discounting each explicit dividend payment expected over the vesting period, or (2) discounting over the remaining vesting period by using the dividend yield on the modification date. The total incremental cost is then amortized prospectively over the remaining requisite service period.

Going forward, dividends generally do not have an expense impact. For restricted shares, the fair value of new awards would be the stock price on the grant date, with no discount since participants are receiving DEUs. Said another way, since the stock price on the grant date already factors in future expected dividends, accruing additional expense for the dividends would be double-counting.

However, share-based DEUs are dilutive to EPS and must be disclosed in footnote share roll-forwards, and both cash and share-settled dividends create corporate tax benefits. Note that there are additional implications if dividends are nonforfeitable (meaning dividends are paid regardless of whether the parent award vests), namely, recording expense for dividends accrued on shares that forfeit and the two-class method for EPS.

Whether participants receive cash dividends or DEUs, precise tracking is essential. This may require engaging with your stock administration provider as well as developing internal processes and controls to support all of the reporting requirements. Special care is needed for certain populations, such as performance awards, which likely have dividends scaled up or down based on the final percentage achieved. Share-based DEUs themselves accrue DEUs, which a robust system should be able to handle. They should also be counted against the share pool. For cash dividends, tracking is critical for accruing a liability and separating between short-term (within 1 year of vest) and long-term (more than 1 year from vest). We’ve worked with many dividend payers on developing automated reporting processes, so we welcome questions from issuers of any size.

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Do you have a question you’d like to see us cover? Or do you have a situation like one of those above that you’d like to unpack? Please feel free to contact us.