The Financial Accounting Foundation has completed their post-implementation review of FAS 123(R) (see my August 27, 2013 blog entry, “FAF to Review FAS 123(R)“) and the upshot is that they think the standard (now known as ASC 718) needs to be simplified. In response the FASB has proposed some very significant amendments to the standard. In addition to the summary I provide here, be sure to listen to our newest Equity Expert podcast, in which Jenn Namazi discusses the proposed amendments with Ken Stoler and Nicole Berman of PwC.
Share Withholding
Currently, ASC 718 provides that withholding for taxes in excess of the statutorily required rate triggers liability treatment. This has been a problem because of rounding considerations (if companies round the shares withheld up to the nearest whole share, does that constitute withholding in excess of the required rate) and, more significantly in jurisdictions (e.g., US states and other countries) that don’t have a flat withholding rate. The FASB proposal would change the standard to allow share withholding up to the maximum tax rate in the applicable jurisdiction, regardless of the individual’s actual tax rate.
This is obviously great news and would make share withholding a lot more feasible for non-US employees. There is still the question of rounding, however. It also isn’t clear how this would apply in the case of mobile employees. Finally, don’t forget that, here in the US, the IRS still opposes excess withholding at the federal level (see my January 9, 2013 blog entry “Supplemental Withholding“).
Estimated Forfeitures
Estimating forfeitures is one of the most complicated aspects of ASC 718—I’ve seen multiple presentations of over an hour in length on just this topic. The FASB has proposed to dispense with this altogether and allow companies to simply recognize the effect of forfeitures as they occur. Companies would be required to make a policy decision as to how they want to recognize forfeitures that would apply to all awards they grant. I assume that this would apply only to forfeitures due to service-related vesting conditions, but I don’t know this for certain.
Tax Accounting
Another area of the standard that has provided a wealth of material for NASPP webcasts and Conference sessions is how companies account for the tax deductions resulting from stock awards. FASB’s proposal would change the standard to require that all tax savings and all shortfalls flow through the income statement. If an award results in a deduction in excess of the expense recognized for it, the excess savings would reduce tax expense (currently, the excess is recorded to APIC). Likewise, shortfalls would always increase tax expense (currently, shortfalls are deducted from the company’s APIC balance to the extent possible, before reducing tax expense).
With this change, companies would no longer need to track what portion of APIC is attributable to excess tax deductions from stock plan transactions. But this would introduce significant variability into the income statement (which is the reason FASB decided against this approach ten years ago). This approach gets us closer to convergence with IFRS 2, but is still not completely aligned with that standard (in IFRS 2, all excess deductions run through APIC and all shortfalls run through the P&L). But this makes me wonder if companies will simply record the windfall/shortfall tax deductions as they occur, or would they have to estimate the potential outcome and adjust tax expense each period until the deduction is finalized (as under IFRS 2)?
Now? Now They Figure This Out?!
All of these changes will eventually make life under ASC 718 a heck of a lot simpler than it is now. That’s the good news. The bad news is that it’s really too bad the FASB couldn’t have figured this out ten years ago. Not to say “I told you so” but I’m sure there were comment letters on the exposure draft that warned the FASB that the requirements in at least two of these areas were too complicated (I’m sure of this because I drafted one of them).
If you are already thinking wistfully about how much more productively you could have used all that time you spent learning about estimated forfeitures and tax accounting, imagine how your administrative providers must feel. They’ve spent the last ten years (and a lot of resources) developing functionality to help you comply with these requirements; now they’ll have to develop new functionality to comply with the new simpler requirements.
More Info
I’ll have more thoughts on this and some of the FASB’s other decisions—yes, there’s more!—next week. For now, check out the PwC and Mercer alerts that we posted to the NASPP website (under “More Information” in our alert, “FASB Proposes Amendments to ASC 718“). And listen to our Equity Expert podcast on the proposed amendments with Ken Stoler and Nicole Berman of PwC.
For today’s blog entry, I have a couple of follow-up tidbits related to the recent EITF decision on accounting for awards with performance periods that are longer than the time-based service period. I know you are thinking: “Yeesh, it was bad enough the first time, how much more could there be to say on this topic!” but you don’t write a blog.
Background
To refresh your memory, this applies to performance awards that provide a payout to retirees at the end of the performance period contingent on achieving a non-market condition target (in other words, just about any goal other than stock price or TSR targets). Where awards like this are held by retirement-eligible employees, the awards will not be forfeited in the event of the employees’ terminations but could still be forfeited due to failure to achieve the performance targets. The service component of the vesting requirements has been fulfilled but not the performance component.
This also applies to awards granted by private companies that vest based on both a time-based schedule and upon an IPO/CIC.
The EITF came to the same conclusion you probably would have come to on your own. Expense is adjusted for the likelihood that the performance conditions will be achieved; as this estimate changes throughout the performance period, the expense is adjusted commensurately until the end of the period, when the final amount of expense is trued up for the actual vesting outcome. (See “Performance Award Accounting,” April 15, for more information.)
The IASB Does It’s Own Thing
I thought it was just a few maverick practitioners that had taken an opposing position. The alternative approach (which the EITF rejected), is to bake the likelihood of the performance condition/IPO/CIC being achieved into the initial fair value, with no adjustments to expense for changes in estimates or outcome (akin to how market conditions are accounted for).
It turns out, however, that the IASB is one of the maverick practitioners that takes this position. Apparently, the IASB thinks that option pricing models can predict the likelihood of an IPO occurring or earnings targets or similar internal metrics being achieved. Which makes this another area were US GAAP diverges from IFRS. Just something to keep in your back pocket in case conversation lags at the next dinner party you attend.
Mid-Cycle Performance Grants
As I was reading Mercer’s “Grist Report” on the IASB’s decision, I noticed that they also had made a determination with respect to grants made in the middle of a performance cycle. These are typically grants made to new-hire employees. For example, the performance cycle starts in January and an executive is hired in February. All the other execs were granted awards in January at the start of cycle, but the newly hired exec’s award can’t be granted until February.
Under ASC 718, the grant to the newly hired exec is accounted for just like any other performance award. True, his award will have a different fair value than the awards granted in January and the expense of the award will be recorded over a shorter time period (by one month) than the other execs’ awards. But where the award is contingent on non-market conditions, the expense is adjusted based on the likelihood that the goals will be met and is trued up for the actual payout, just like any other performance-conditioned award.
The same treatment applies under IFRS 2, but only if the performance-conditioned award is granted shortly after the performance cycle has begun. Awards granted farther into the performance cycle (in my example, if the exec were hired in, say, June, rather than February) are accounted for in the manner applicable to market conditions (i.e., the vesting contingencies are baked into the initial grant date fair value, with no adjustment to expense for changes in estimates or outcome), even if the targets are internal metrics.
Hmmmm. I’m starting to wonder if discussions like this explain the dearth of dinner parties in my life.
Thanks to Susan Eichen at Mercer for bringing the IASB’s decision to my attention and for explaining the IASB’s positions with respect to mid-cycle performance grants.
The Financial Accounting Foundation, or FAF, has announced that they are going to conduct a post-implementation review of FAS 123(R). In today’s blog, I take a look at what this might mean for the future of stock plan accounting.
What the Heck?
The FAF oversees and provides funding for the FASB, as well as several other entities involved in promulgating US accounting standards. The FAF has recently begun conducting post-implementation reviews to evaluate the effectiveness of standards issued by the FASB (and also standards issued by GASB, Governmental Accounting Standards Board, which is the only other accounting standards board here in the United States–they aren’t just targeting the FASB).
You Can Take Your Aluminum Hat Off–They’re Probably Not Out to Get Us
Upon reading that the FAF is planning a post-implementation review of FAS 123(R), my first reaction was alarm. In the past, when various accounting authorities have reviewed US accounting standards on stock compensation, the outcomes haven’t been particularly favorable for those of us on team stock awards (notable examples include FIN 44, EITF 96-18, and, of course, FAS 123(R)). The FAF says (on its website) that standards are selected for a PIR based on “considerable amount of stakeholder input indicating that the standard might not be meeting its stated objectives.”
So I asked Bill Dunn at PwC about it and he put me in touch with his colleagues Ken Stoler and Pat Durbin (Pat is PwC’s national practice leader on standard setting). Ken and Pat don’t think the PIR signals any significant changes for stock plan accounting. They think that FAS 123(R) was selected for review merely because it is complex, pervasive, and has raised numerous practice issues–not because the FAF thinks there is anything wrong with the standard. They suspect that any changes that the FAF recommends will be minor and only in areas where divergence in practice has developed.
What Is a PIR?
According to the FAF website, the PIR has three main goals: to determine if the standard meets its stated objectives, to evaluate the standard’s implementation and compliance costs and benefits, and to provide feedback to improve the standard setting process. The PIR team uses a variety of procedures, including reviewing the project archives, reviewing academic and other research, and collecting stakeholder input via surveys and interviews. They then present their findings to the FASB’s chair and oversight committee.
As I understand it, the PIR team doesn’t recommend any specific standard-setting actions, they simply point out areas of concern and it is up to the FASB to decide whether or not to take action. Which means that this is a loonnnng process. First the FAF has to conclude the PIR, which takes a long time, and then the FASB has to act on their concerns, which takes even longer. But, the silver lining for me is that it sounds like there could be fodder for several blog entries along the way, especially if the FAF finds any areas of concern (which surely they will–it’s a big standard).
Why “FAS 123(R)”?
My other thought upon reading this was to wonder why the FAF calls the standard “FAS 123(R)” when the rest of us have to call it “ASC 718.” Because, frankly, it’s been a struggle to get used to the ASC 718 moniker. If the FAF can call it FAS 123(R), I thought maybe the rest of us could too. But, unfortunately, Ken doesn’t think we’ll all go back to calling it FAS 123(R) anytime soon.
On April 30, the FASB’s Small Business Advisory Committee (SBAC) met to discuss whether the Private Company Council (PCC) should add the topic of stock plan accounting to their agenda. I listened to the whole discussion–even the parts that were hard to hear–so I figure I’m due a blog entry out of it.
Background
Some of you may recall that, back in February of last year, I blogged about the FASB forming a special group to review whether exceptions or modifications for private companies should be made to GAAP (“A Different Standard for Private Companies,” February 7, 2012). At the time, the name of the group was the Private Company Standards Improvement Council. It’s not quite clear how we got from there to here (maybe FASB didn’t like the fact that everyone would probably pronounce the acronym “pic-sic”), but the PCC seems to be the current iteration of that group.
The SBAC provides a forum for the small business community to share ideas, experiences, etc. with the FASB. The PCC is considering taking up the topic of stock plan accounting–specifically, should the requirements of ASC 718 be modified for private companies or should private companies be exempt from some of the requirements–and asked the SBAC to discuss whether this is a big enough issue for small companies that they (the PCC) should add it to their agenda.
The SBAC Discussion
The FASB, in preparation for the meeting, and the committee did identify a number of concerns for private companies, including:
Valuation of underlying stock and valuation of options can both be difficult and costly.
The required disclosures may be onerous for private companies.
It can be difficult for private companies to interpret and apply the relevant accounting principles without help from paid advisors and there are probably lots of tedious rules that private companies aren’t aware of.
It can be difficult for private companies to determine whether awards are subject to equity or liability treatment due to various redemption provisions that are often utilized by them (e.g., rights of first refusal, repurchase rights, etc.).
The accounting implications of awards issued by private companies don’t really become relevant until a CIC and equity awards could be viewed as a cost to the ultimate buyer, rather than a cost to the issuing company.
Despite these concerns, I was surprised to note that the SBAC wasn’t terribly sympathetic to the idea of carving out some exceptions for private companies. The committee seemed skeptical of how widespread usage of stock compensation is among private companies. Some committee members supported the idea of further research into the level of usage; other members simply didn’t believe that enough private companies offered stock compensation to make the topic worthy of the PCC’s time. Also, some committee members felt that because offering stock compensation is optional, those private companies that offer it should be prepared to devote the resources necessary to account for it correctly.
Interestingly, the committee seemed most concerned about the disclosures. This was a surprise to me because I didn’t think private companies even bothered with the disclosures, given that their financial statements aren’t filed with the SEC. The committee spent so much time talking about the disclosures that I started to think maybe it was a separate agenda item (it wasn’t–I checked). They suggested that for both small public companies and private companies it would be helpful if FASB provided more assistance related to the disclosures, including possibly providing a checklist of annual vs. quarterly and public vs. private disclosures. Coincidentally, in preparing for my session, “Alphabet Soup: 10-K, 10-Q, S-K, Where Does Your Stock Plan Info Go? And Why Should You Care?,” Carrie, Elizabeth, and I had just been discussing the confusion over what information companies are supposed to include in their quarterly disclosures.
The recording of the SBAC meeting is no longer available, but you can access the meeting handouts, which include some of the feedback from SBAC members.
One of the most common types of “unplanned” modifications I see in my consulting work, which we will cover in our presentation, is that of vesting modifications.
The text of the ASC 718 standard says this about modification accounting: Modifications of Awards of Equity Instruments
51. A modification of the terms or conditions of an equity award shall be treated as an exchange of the original award for a new award. …In substance, the entity repurchases the original instrument by issuing a new instrument of equal or greater value, incurring additional compensation cost for any incremental value. The effects of a modification shall be measured as follows:
a. Incremental compensation cost shall be measured as the excess, if any, of the fair value of the modified award determined in accordance with the provisions of this Statement over the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. … b. Total recognized compensation cost for an equity award shall at least equal the fair value of the award at the grant date unless at the date of the modification the performance or service conditions of the original award are not expected to be satisfied. Thus, the total compensation cost measured at the date of a modification shall be (1) the portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered (or has already been rendered) at that date plus (2) the incremental cost resulting from the modification.
But then the examples in ASC 718-20-55-111 through ASC 718-20-55-118 go on to delineate four, count them four, different types of vesting modifications, with two different treatments:
Type I: Probable to Probable: Recognize fair value of original award + incremental expense, if any.
Type II: Probable to Improbable: Recognize fair value of original award + incremental expense, if any.
Type III: Improbable to Probable: New fair value only. Reverse expense for any unvested shares.
Type IV: Improbable to Improbable: New fair value only. Reverse expense for any unvested shares.
Type II and Type IV are incredibly uncommon, but we DO see a good number of Type I and Type III. Type I are often triggered by option exchanges, or any modification to already vested shares, like an extension of exercise grace period at termination. Type III modifications are also quite common at the time of termination when unvested shares are accelerated.
How do you handle the modifications? First, decide if they are Type I or Type III. If the shares are vested, chances are good you are dealing with a Type I. If the shares would have been cancelled if not for the termination, then chances are good you have a Type III. If a Type I, perform two fair value calculations: one before the change, and one after, and compare the expense to determine your incremental expense. If a Type III, you need only one fair value calculation, using the attributes of the grant after the modification. Calculate how much expense has already been booked for the unvested shares in the grant and true up (or down) to the new fair value.
There is good news about most modifications, especially those at the time of termination: they are generally fairly simple one-time calculations where all the expense is booked immediately. Once and done. The bad news is that most systems have limited support for modification accounting and the inputs can be quite tricky. What is the expected term of an underwater option before it is exchanged for a new option? Is it the remaining expected term from the original grant date fair value? The remaining contractual life? An expected term calculated by a Monte Carlo simulation? Each company must decide for itself. A few examples in the standard seem to point to remaining contractual term, but the Monte Carlo simulation approach seems to fly past audit as well. No two audit firms, or audit partners, seem to have the same opinions.
Join me and my talented co-panelists in New Orleans as we wrestle modification accounting to the ground and give you a solid understanding of the required treatment and some varying interpretations. Laissez Les Bon Temps Roulez!
Many things in life take on a “hurry up and wait” path, and the SEC’s evaluation of whether or not to incorporate International Financial Reporting Standards (“IFRS”) into U.S. accounting practices is no different. As I write this blog, we are approaching four years since the SEC first issued their proposed road map to IFRS (August 27, 2008) and the acronym IFRS became a buzz word in the stock compensation world.
What’s the Latest News?
On July 13th, the SEC issued a long-awaited staff report that basically summarized their considerations around whether or not the U.S. should adopt IFRS. The key word here is “considerations”. The bottom line of the SEC’s report can be articulated quite simply: the SEC’s report did not contain a recommendation on whether IFRS should be adopted, or a decision and time frame for potential adoption, but rather an analysis of all of the related pros and cons. Where does that leave us? We remain in uncertain territory as to if, when and how IFRS will be adopted (thus the title of this blog). We are still very much in “if” territory, though many accounting experts keeping watch on this issue seem to feel strongly that it’s still a matter of “how” and “when” and not “if”.
No News is….No News!
The IASB has vocalized their impatience surrounding the U.S.’s slow decision making process when it comes to adopting IFRS, so that pressure is undoubtedly mounting. Even so, the prospect of the U.S. adopting IFRS remains on the horizon, and is not something the SEC is likely to decide on before the end of 2012. The good news is that we can turn our attention to more pressing matters (such as what to do about all the tax rate changes that are scheduled to kick in January 1, 2013), and, at least from a stock compensation perspective, not have to worry about looming accounting changes having an impact on us anytime soon.
This is still on the radar, and we’ll keep any updates coming. If you do have spare time, our IFRS2 Portal contains information on many of the considerations on the topic.
With the impending Facebook IPO crowding out just about any other news in my Google alert these days, I’ve got private companies on my mind. I don’t have anything to add on the Facebook IPO, but there has been an interesting development recently relating to accounting standards for private companies.
Debate Rages Over Private Company Accounting There is apparently a heated debate in the accounting community (specifically between the Financial Accounting Foundation, which oversees the FASB, and the American Institute of Certified Public Accountants) over whether the FASB should have oversight of accounting standards for private companies. So much so that the AICPA put together the Blue-Ribbon Panel on Standard Setting for Private Companies (is that the BRPSSPC? what exactly is a blue-ribbon panel, anyway? I thought it was something related to 4H or maybe beer…) to evaluate the matter and make recommendations. In response to the panel’s recommendations, the FAF has proposed creating the Private Company Standards Improvement Council, which would review current US GAAP to determine whether exceptions or modifications should be made for private companies.
Any suggestions made by the PCSIC (is that pronounced “pic-sic”?) would be subject to approval by the FASB. The problem with this, however, is that the Blue-Ribbon Panel recommended creating a completely separate, independent entity that wouldn’t be beholden to the FASB. The AICPA seems to be vehemently opposed to any approach where the FASB still has authority over the standards for private companies, and has threatened to take their toys and go home to create their own standards setting authority if the FAF proceeds with its proposal. (See “AICPA Turns Up Volume on Call for Independent Board,” Matthew Lamoreaux, Journal of Accountancy, October 18, 2011.)
I have no idea what this might mean for how private companies account for stock compensation, but I can definitely think of a few things I’d like to change about ASC 718 if I were a private company. (Ok, heck, I can think of some things I’d like to change even if I were a public company. In fact, let’s just scrap the whole standard.) It does surprise me that when the rest of the world seems to be focused on convergence, we are actually considering bifurcating our accounting standards here in the U.S. Kind of seems like the wrong direction…
Why Can’t Public Companies Do This?
Now, I imagine some of you that work for public companies are thinking: “Hey! Wait a minute here. If private companies can ignore the FASB and create their own standards setting organization, why can’t we?” Private companies can do this because, for the most part, their financial statements aren’t filed with the SEC, which requires the statements to be prepared in accordance with GAAP as determined by the FASB. Since private companies don’t file their financial statements with the SEC, they don’t have to follow the SEC’s rules (at least with respect to financial statements–there are other securities laws they still have to comply with, more on this in a future blog). And, other than the authority vested in FASB by the SEC, there’s no law that says that FASB is the supreme ruler of GAAP. So private companies can do whatever they want with their financial statements, so long as any investors and lenders that might want to review their financials are willing to accept them. Public companies, however, are still stuck with the FASB, unless you can somehow convince the SEC to let you do what you want, too. Good luck with that.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Last week, I compared Apple and Google’s stock compensation expenses and determined that Google’s expense is significantly higher because Google’s grants have historically been for greater amounts of fair value. This week I look at the underlying question of why Google is granting more value (and, thus, presumably more compensation) to its employees.
Apple and Google: The Real Question All other things being equal, both companies are competing for the same talent pool, in the same area of the country, and should presumably be granting about the same amount of fair value. In fact, because Google has about half as many employees as Apple, you might expect Google to be granting awards for about half as much aggregate fair value as Apple, not almost twice as much fair value, as has been the case in some years.
Mitigating Circumstances
Of course, it’s not that simple. I’m sure part of the problem is perceived value. From a fair value standpoint, the higher the stock price, the more value an option has (both companies grant a combination of options and stock). But employee’s tend to assign a lower value to options with a higher exercise price. So while Google’s skyrocketing stock price (averaging about 2.4 times higher than Apple’s over the four years of grants that I compared) has also caused their stock plan expense to skyrocket, that hasn’t translated into higher perceived value for employees. In fact, the reverse is true. So Google has likely had to grant a disproportionately high number of shares for its employees to assign the same value to their option grants as Apple’s employees do. This is one of the inefficiencies of stock options.
Another consideration may be other compensation programs that each company offers. A response to the blog I referenced last week noted that Apple has an ESPP but Google doesn’t. (Wait–what? Google doesn’t have an ESPP? How in the heck can that be? It’s true though, their 10-K makes no mention of an ESPP.) Because Apple has an ESPP, which, in my opinion, has a high perceived value in comparison to fair value (especially in Silicon Valley), they may be able to make smaller awards to employees. Apple’s ESPP increases its stock plan expense, however, so this clearly isn’t the whole story. But Apple may offer other benefits–bigger cash bonuses, work-life programs, etc.– that aren’t included in their stock plan expense and that offset the smaller awards to employees.
And, although we think of these companies as being located in Silicon Valley, they are both large organizations with offices and employees in many locations. Apple, for example, has main campuses in Austin, Singapore, and Ireland, in addition to Silicon Valley. Having offices outside of the valley may impact Apple’s compensation structure.
The Real Reason
Finally, however, I suspect that the real reason Google is recognizing more expense for their stock plan can be found in the Beneficial Ownership of Management Table in the proxy statements of the two companies. As a group, Apple’s executives and directors control less than 1% of Apple’s outstanding common stock. Google’s executives and directors as a group control 69% of the votes on Google’s stock. In fact, the two founders together control close to 58% of the votes.
The amount of votes that Google management controls means that Google gets to do things with its stock plan that Apple’s shareholders probably won’t stand for, including offer a one-for-one option exchange and grant awards for greater value year after year. Google doesn’t care about burn rates and overhang: they aren’t worried about getting approval for their next allocation of shares to their plan (or their Say-on-Pay proposal)–they already have the votes they need.
Paid Out?
It’s interesting to me that the blogger characterized the stock plan expense as amounts that were “paid out”: “On last week’s Google (GOOG) earnings call, CFO, Patrick Pichette revealed that Google paid out [emphasis added] $384 million in stock-based compensation in the June quarter.” He makes a similar statement regarding Apple.
I didn’t listen to the earnings calls, but I’d be surprised if the companies characterized this as a pay-out. When I first read the blog, I thought maybe he was referring to the intrinsic value realized upon exercise of options, and not stock compensation expense, but Google employees only realized $86 million in intrinsic value on their option exercises (and an undisclosed amount, but less than $4 million, on sales of options in Google’s TSO program), so this isn’t the case.
I suspect this is a common misperception in the media and I wonder if the blogger understands that the expense Google and Apple recognized has no relation whatsoever to the amounts employees are actually realizing on their stock compensation.
NASPP Conference Hotel is Filling Up Don’t wait any longer to make your hotel reservations for the 19th Annual NASPP Conference–the Conference hotel is quickly filling up. The Conference will be held from November 1-4 in San Francisco; register today and make your hotel reservations before it’s too late!
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Don’t miss your local NASPP chapter meetings in Michigan, Phoenix, and San Diego. Robyn Shutak, the NASPP’s Education Director, will be at the San Diego meeting and both Robyn and I will be at the Phoenix meeting. We hope to see you there!
A few weeks ago, the following headline showed up in one of my Google alerts: “Why Did Google Pay Nearly Twice In Stock-Based Comp than Apple last Quarter?” I like to think of myself as being pretty smart about stock plan accounting, so this seemed like a question I ought to be able to answer. Today, I take it on.
Apple to Google: Stock-Based Compensation As noted in the story, both companies are Silicon Valley high-tech companies, competing for a lot of the same talent pool against a lot of the same companies, so you’d expect them to have similar compensation strategies. Digging a little further into their Forms 10-K, I was able to determine that they both grant a mix of stock options and RSUs. Apple has some RSUs that vest in as few as two years and Google has some RSUs that have some sort of cliff vesting that I couldn’t figure out from their disclosures, but other than those minor differences, their options and awards vest over four years. In addition, both companies recognize expense on a straight-line basis, so monthly versus annual vesting wouldn’t account for a difference in the expense they recognize. (Google has options that vest monthly; Apple’s options vest annually, bi-annually, or quarterly. Google appears to have at least some RSUs that vest annually, I couldn’t figure this out for Apple).
Apple’s stock plan expense for their quarter ending on June 25, 2011 was $284 million. Google’s stock plan expense for essentially the same quarter was $435 million.
Is it Google’s Exchange Program?
At first I thought maybe the difference was due to Google’s option exchange program. In March 2009, Google completed an option exchange program that was notable in that 1) it was a one-for-one exchange, which is virturally unheard of these days and 2) they allowed options that were barely underwater to be included in the exchange, rather than including only those options that had exercise prices in excess of their 52-week high. The incremental expense for a one-for-one exchange that included somewhere around 50% of their outstanding options seemed like a good candidate to explain the difference in expense.
But I don’t think this is it. The exchange resulted in a charge of $360 million, of which $189 million has already been recognized and the rest ($171 million) will be recognized over another three or so years. This could account for some of the difference, but I don’t think it is the whole story.
So What Is the Difference?
I think it just comes down to the fact that Google has been making grants for more value in the past few years than Apple. This is probably in part due to the fact that Apple’s average stock price for the past four years is around $210 per share and Google’s average stock price for this same period is around $510 per share. Where grants are based on a percentage of compensation or some other monetary amount, a higher stock price theoretically means that the company will grant options and awards for fewer shares. But, given differences in compensation philosophies between companies, I’m not sure that this will be true when comparing, say, Apple to Google.
In other words, if Apple’s stock price were to double from one year to the next, I would expect that the number of shares they grant might decrease commensurately. But just because Apple’s stock price is less than half Google’s price doesn’t necessarily mean that they are granting a commensurately greater number of shares than Google. There are just too many other factors at play in compensation decisions.
And, in fact, the total fair value of Google’s grants (both options and RSUs) for their 2010 fiscal year was somewhere around $2.4 billion, whereas the total fair value of Apple’s grants for the same period was somewhere around $1.3 billion. For their 2009 fiscal years, there is a similar discrepancy: $1.6 billion in fair value for Googe’s grants and .9 billion in fair value for Apple’s grants. Interestingly, for 2008, the companies granted about the same amount of fair value. but for the 2007 year, the aggregate fair value of Google’s grants was $1.8 billion to $.6 billion for Apple.
BTW: 1) Note that I am backing into the aggregate fair value per year numbers by multiplying the shares granted by the weighted average fair value for grants during the year. 2) Kudos to Apple for voluntarily including three years in their stock plan activity roll-forward, so that I didn’t have to pull up each 10-K separately to get their grant amounts for all three years.
With vesting schedules–and, consequently, service periods–of four years, both Google and Apple’s current expense includes the fair value of grants made in prior years, going all the way back to 2007. Because Google has historically issued awards with a greater aggregate fair value than Apple, they are now recognizing more expense for those awards (plus they have some additional cost as a result of the option exchange program).
Tune in Next Week
This perhaps explains the difference in the current period expense, but it doesn’t explain why Google is granting awards for significantly more fair value than Apple, especially given that as of their most recent Forms 10-K, Google has only 24,400 employee compared to Apple’s 46,600 employees. Tune in next week when I discuss this question.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
I’m sure many of my readers have been disappointed that I haven’t been writing much about accounting lately, so today I take a look at the status of IFRS here in the United States.
IFRS: No News is Good News? The fact is that there hasn’t really been much to report on IFRS lately. As my readers know, back in 2008, the SEC proposed a roadmap that would have required adoption of IFRS in the United States, phased in from 2014 to 2016. Then the economy collapsed and rushing headlong into IFRS seemed like maybe not such a good idea. More recently, there have apparently been some developments–that I do not understand in the least, so don’t ask me about them–relating to the accounting treatment of highly devalued debt securities that have also given regulators pause on the idea of wholesale adoption of IFRS here in the United States.
In February of last year, the SEC announced that it backed off on the roadmap a bit and would make a decision in 2011 as to whether or not IFRS should be adopted in the United States. I expect that it will be several more months before the SEC announces its decision.
Condorsement?
More recently, the idea of “condorsement” has been proposed. Under this approach, rather than requiring adoption of IFRS, U.S. GAAP would continue to exist, but FASB would work towards converging our standards to IFRS on a standard-by-standard basis. I admit that I am a little fuzzy on how condorsement differs from convergence. I would offer ten points to anyone that can explain it, but, to be honest, I don’t think I really want to know.
Convergence
Speaking of convergence, the FASB and IASB have an ongoing program designed to achieve this goal for projects specified under a memorandum of understanding (issued in 2006 and updated in 2008). Last month, they announced that five of the projects had been completed and the remaining three will be completed in the second half of 2011 (a slight delay from the original schedule). None of the projects relate to stock compensation, however. Phew.
SEC Roundtable
At the same time that the FASB and IASB announced the progress on their convergence project, the SEC announced that it will sponsor a Roundtable on July 7, 2011 to discuss incorporating IFRS into the U.S. financial reporting system.
A news bulletin issued by Morrison and Foerster discusses the FASB/IASB and SEC announcements.
Share Withholding: No News is Bad News
A key difference between IFRS 2 and ASC 718 is that, under IFRS 2, liability treatment is required any time shares are withheld by the company to cover tax withholding. I think many of us harbor a secret hope that this will somehow change before IFRS is required in the United States (either that, or that IFRS is never required and this somehow is left out of convergence/condorsement). So far, however, no such luck. A PricewaterhouseCoopers alert issued in September of last year reports that the Interpretations committee of the IASB refused to carve out an exception. The committee felt it did not have the authority to do so; the matter can still be presented to the IASB for relief.
Save Big on NASPP Conference by Completing Survey NASPP members that complete the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte) by this Friday, May 13, can save 10% off the early-bird rate for the 19th Annual NASPP Conference (which is already a significant savings off the regular registration rate). Register to complete the survey today–so you don’t have to explain to your boss why you missed out on this rate.
Only Ten Days Left for NASPP Conference Early-Bird Rate It’s hard to believe how time flies, but the 19th Annual NASPP Conference early-bird rate expires this Friday, May 13. This deadline will not be extended–register for the Conference today, so you don’t miss out.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the early-bird rate is only available until May 13.