On July 18th, Corporate Focus hosted a new live webinar called: “Straight Talk on Stock Option Expensing Under ASC Topic 718: Variables, Expensing and Disclosures … Explained.” A recorded version of the presentation is now available for download.
This webinar was specifically designed for CFOs, controllers, consultants and attorneys – in fact, really anyone who helps solve the ASC Topic 718 stock option expensing puzzle for privately-held companies – to help them better understand:
- The six variables used by the Black-Scholes formula to determine the grant-date fair value for a stock option award;
- Eight terms that are required to properly amortize the fair value over the service period, including true-ups related to vesting and forfeitures; and
- Two reports that provide the requisite financial reporting disclosures needed by auditors
Prior to the event, we conducted a survey which asked attendees to rate just how easy their equity accounting processes were and presented the results at the start of the webinar. While a few of the results were not surprising, some were.
For example, when asked which part of option expensing is the most challenging, 42% responded that generating the fair value using the Black-Scholes formula is the most challenging. 38% of respondents indicated that determining peer company volatility was most challenging and 32% selected running the requisite disclosures under ASC Topic 718.
The write-in responses to this question also offered an interesting look into the complexity of option expensing, including:
- “Maintaining adequate notice information to employees upon award vesting…”
- “Management making modifications of terms without knowing there are accounting consequences…”
- “Making sure the GAAP provisions are followed accurately…”
Of course, we’ve edited a few of the more ‘colorful’ responses received. Needless to say, they captured some of the ‘real’ frustration surrounding the complexity of stock option expensing.
When asked to rate the level of scrutiny their auditors provide during their annual review of their equity compensation reporting, 28% of respondents answered that they receive a very high level of scrutiny. Surprisingly, 34% of respondents had not yet conducted an equity compensation reporting audit as part of their annual audit process.
When asked how they would describe the level of scrutiny that their board, management team or investors give to their capitalization table, 44% answered “Cursory review a few times a year,” while 26% answered either “A more intense review a few times a year” or “A more intense review at least quarterly.”
When asked how many times they’ve been concerned if they could find an original equity document, such as board minutes or option agreements, a surprising 32% answered either “many times” or “I can’t count that high!”
And finally, when asked what process or system they have in place for their equity administration, accounting and compliance needs, 68% answered “spreadsheets.” Of course, we’ve already offered a few reasons why using spreadsheets make it very difficult to accurately report equity compensation expense without a large investment in time and effort.
So what do these survey results tell us? That after five years, reporting equity compensation expense for employee stock options under ASC Topic 718 (formerly FAS 123R) is still a source of frustration and needless stress for many busy finance and legal professionals since most are still using spreadsheets. Hopefully, the level of frustration and amount of time and effort will continue to trend down as we survey this area in the future and as more privately-held companies with stock option plans make the switch from spreadsheets to more automated systems and adopt best practices.