Recently, we attended a CFO RoundTable panel on Revenue Recognition Under Evolving FASB Standards, which reviewed new privately-held company accounting standards currently in consideration for adoption in the next 3 years. While there were several key takeaways for CFOs to consider, one message rang clear – to successfully handle these new and complex accounting standards, CFOs must change the way they manage and report their financial information.
In fact, Jim McGeever, COO of NetSuite and a speaker on the Revenue Recognition panel put it best: “Spreadsheets in general are no longer an option. The complexity of the proposed [accounting] standard and the coordination it will involve with all of your teams, including sales, finance, support and more, will push the boundaries of spreadsheets. Now is the time to consider an automated, centralized process with which to share, track and report on your financials.”
First, we couldn’t have said that any better ourselves. Second, we fully recognize that corporate accounting on all levels, from multi-element revenue arrangements down to equity reporting and accounting under ASC Topic 718 (formerly FAS 123R), has changed dramatically over the past few years. And while these accounting changes have greatly improved the transparency and accuracy of financial reporting of privately-held companies, it’s also surpassed the capabilities of what CFOs can manage with spreadsheets alone.
Take, for example, equity reporting under ASC Topic 718 using Excel. While Excel can certainly handle the ownership tracking of a few records, under the current equity accounting standard, its capabilities fall short of acceptable. As examples of this:
- It Can’t Easily and Accurately Track Records
Whether it’s 25 records or 250, the amount of manual work that you must conduct to track your ownership records is enormous when laboring with Excel. And let’s not even mention the tracking of any custom vesting schedules. Do you know how many shares vest daily or at the end of any period?
- It Can’t Efficiently Calculate Inputs to Generate Fair Value
When valuing option grants using the Black-Scholes method (or any other method for that matter), not only is the formula itself complicated, but the inputs that are needed to correctly calculate fair value using Black-Scholes are in themselves complicated. For example, to correctly use Black-Scholes, you must first calculate your expected term. Then, using that expected term, calculate the volatility based on live peer company stock price data and interest rates based on data that you find on an external source like Yahoo! Finance. Now imagine using these calculations in spreadsheets. What if a decimal point is off? What if you accidentally type the wrong number into the formula without realizing it? And finally, imagine just trying to remember to get each peer’s stock price on a regular basis.
- It Can’t Efficiently Amortize the Amount to Expense on a Daily Basis
Of course, once you’ve calculated your expected term and volatility, you’re not finished with your spreadsheets quite yet. Once you have the fair value per share, you must apply that value across each of your option grants, across the entire service period for the grant (and we all know that calculation isn’t exactly 1+1).So again, we see an issue with data accuracy. How can you be absolutely sure that your calculations are 100% accurate? That there are no errors, even the slightest one, anywhere in your spreadsheets? And by the way, exactly how many spreadsheets do you have? How many external parties (i.e. your lawyers, your accounting team, etc.) have access to and can edit the data?
- It Can’t Automate True Up Amounts to Expense for Vesting and Forfeitures
Once you’ve amortized the expense on grant date, you have to re-amortize it at every reporting period to true-up for actual vesting events and forfeitures. Even if you have only 25 optionees that ends up with a lot of manual calculations in Excel.
- It Can’t Automate Disclosure Calculations
Let’s say that your previous calculations in Excel are correct and there are absolutely no mistakes. Before you celebrate, remember – you still have to report a multitude of disclosures to your auditors, which means that you are now responsible for running every single report based on your spreadsheet data. Are your auditors going to be satisfied with your spreadsheets? Are they going to take longer and cost more if they need to review your manual spreadsheets?
Let’s face it – Excel was never built to sufficiently handle the complex equity accounting and reporting requirements of privately-held companies today. While there is always a place for Excel and spreadsheets in finance, unfortunately, the real-time, accurate data calculations and reporting that ASC Topic 718 requires means that CFOs need to find new ways to centralize and automate their option expensing and reporting to better track, report and share their information. In the end, you will generate better results in less time and at a lower cost. If you don’t see it this way, ask your auditors which they prefer.
Let us know your feedback and experience using spreadsheets for equity compensation reporting or what you are hearing from your auditors and other service providers.