The NASPP Blog

Now that ASU 2016-09 allows companies to record expense for service-based awards without applying an estimated forfeiture rate to the accruals (see “Update to ASC 718: The FASB’s Decisions“), some our readers may be wondering how to make the transition to accounting for forfeitures as they occur. This is done by recording a cumulative adjustment to retained earnings in the period you adopt the ASU. In today’s guest blog entry, Elizabeth Dodge of Equity Plan Solutions explains how to calculate this adjustment (which she refers to as a “true-up amount”).

How to Get Rid of Your Estimated Forfeiture Rate

By Elizabeth Dodge, Equity Plan Solutions

So, you’ve decided to get rid of your estimated forfeiture rate… or at least decided to consider it. Congratulations! I recommend the elimination of an estimated forfeiture rate to all my clients. It simplifies equity accounting in so many ways.

Now how do you DO it? And better yet, do it without the auditors crawling all over you with time-consuming questions?

The short answer to the first question is:

1. Run an expense report, life-to-date WITH your current estimated forfeiture rate.
2. Run an expense report, life-to-date with a ZERO forfeiture rate.
3. Compare “To Date” (aka cumulative) expense (or, if your report doesn’t give you To Date, add prior and current expense and compare that).

The difference is your true up amount. Yes, it’s that easy. Yes, proving it’s correct is a little harder. More on that later.

Note: If you are using a system that delays the reversal of expense to the VEST DATE, it’s not QUITE this easy, but that is outside the scope of this article.

Why life-to-date?

Can’t I just run the current period report with and without the rate and take the difference in To Date (aka cumulative) Expense. Yes, you SHOULD be able to do that, but your auditors will want to kick the tires on your analysis and having ALL your grants on the report will help them do that. And life-to-date (LTD) should be from your adoption of FAS 123(R) (now known as ASC 718)—January 1, 2006 for many companies—until the end of your most recent reporting period—December 31, 2016 for many companies.

So now how do you tick and tie the numbers to your auditors’ satisfaction?

The approach I’ve used thus far with all my clients that have early adopted or considered adopting is to create a spreadsheet with four tabs:

1. LTD Expense Report With a Forfeiture Rate
2. LTD Expense Report Without a Forfeiture rate
3. Comparison tab
4. Summary tab

The Comparison tab has one row per grant and indicates the grant date, unvested shares (optional), final vest date and cancel date, if any, for each. It also pulls in expense from tab 1 and tab 2 and compares them in a “Variance” column. Then I add a “Reason” column that categorizes the grants into (generally) three categories:

• Fully Vested, No Cancellation: These grants should have no expense variance.
• Cancelled: These grants should have no expense variance (unless you are using True Up at Vest).
• Still Vesting, No Cancellation: All grants should have higher expense on the Without Forfeiture Rate tab

You could assign these categories by using formulas. I usually use the low-tech method of filtering for a given criteria and then pasting the Reason down through all the rows to which it applies.

On the Summary tab, I summarize the expense totals from both tabs and then use a pivot table to summarize the reasons (or categories) and the associated variances (or lack thereof):

Thus far no auditors have had an issue with this approach. (Of course, now that I’ve said that, I’ve jinxed myself.) Have at it! And have fun!

Elizabeth is a Principal for Equity Plan Solutions, LLC, providing equity compensation consulting services to companies from startups to large public corporations. Previously, Elizabeth was a consultant and Vice President for Stock & Option Solutions, Inc. and held product management roles in stock plan services at BNY Mellon and ETRADE Corporate Services. Elizabeth became a Certified Equity Professional in 1999 and co-authors the chapter on accounting in The Stock Option Book. She also serves on the Executive Advisory Committee of the National Association of Stock Plan Professionals and was honored with the NASPP Individual Achievement award in 2012. You can contact Elizabeth at edodge@equityplansolutions.net.