Are your stock plan disclosures too much, not enough, or just right? Find out with the 19th Annual NASPP Conference session “Indecent Disclosures: Polishing and Perfecting Disclosures under ASC 718.” Today’s blog entry is guest authored by Elizabeth Dodge of Stock & Option Solutions, leader of this panel at the Conference. Elizabeth discusses one vexing aspect of the disclosures that the panel will cover at the Conference.

Indecent Disclosures: Polishing and Perfecting Disclosures under ASC 718
By Elizabeth Dodge, Stock & Option Solutions

Disclosures under ASC 718 are a dreaded topic for nearly all my clients. The standard is unclear in some areas and flouts common sense in others, so what is a company to do? The answer? Do your best and try not to sweat the small stuff, unless your auditors force you to do so. In this entry, I’ll review one confusing part of the standard relating to disclosures and suggest ‘the right’ approach to take.

What Are “Shares of Nonvested Stock”?

In FAS 123(R), pre-codification, paragraph 240(b)(2) required the disclosure of:

The number and weighted-average grant date fair value…of equity instruments not specified in paragraph A240(b)(1) (for example, shares of nonvested stock), for each of the following groups of equity instruments: (a) those nonvested at the beginning of the year, (b) those nonvested at the end of the year, and those (c) granted, (d) vested, or (e) forfeited during the year. [emphasis added]

Paragraph 240(b)(1) asked for the number and weighted-average exercise price of options (or share units) outstanding. So what the standard seemed to require in the paragragh I quote above is the number and grant-date fair value for instruments other than options and share units, such as “shares of nonvested stock.” Clear as mud, so far? What is a share of nonvested stock, you ask? See footnote 11 on page 7 of the standard which reads:

Nonvested shares granted to employees usually are referred to as restricted shares, but this Statement reserves that term for fully vested and outstanding shares whose sale is contractually or governmentally prohibited for a specified period of time.

As if the standard wasn’t complicated enough, the FASB needed to define their own terms and use terms we thought we understood to refer to something else. Great idea. So a share of nonvested stock is therefore a restricted stock award (not a unit, but the kind of award on which you can file a Section 83(b) election). Here the FASB is lumping options and units (RSUs) together and separating out RSAs into a separate category. Perfectly logical, because RSUs are much more like options than RSAs, wouldn’t you agree? (And if you’re not getting the depth of my sarcasm, try re-reading the text above.)

Okay. So what do we use for weighted average exercise price for an RSU? Most RSUs that I’ve encountered don’t have an exercise price (and in fact, aren’t even exercised!). So obviously you should report zero here?

And most audit partners are unfamiliar with this issue all together. The good news is that most of them seem to ignore the actual language of the standard and, instead, require the same disclosures for RSUs and RSAs, which honestly does make a lot more sense, but isn’t what the standard calls for.

Unfortunately many systems/software providers were reading the standard carefully when they designed their disclosure reports, so often the RSU disclosures have “exercise price” but lack grant date fair value, so you’re often forced to calculate some of these numbers manually.

So now you’re thinking, but the Codification cleared all this confusion right up, didn’t it? Well, no… it did change the language just slightly. It removed “(for example, shares of nonvested stock).” It also added a link to the definition of “Share Units,” which reads: “A contract under which the holder has the right to convert each unit into a specified number of shares of the issuing entity.” Sounds like an RSU to me.

So where does all this leave us? My conclusion: Listen to your auditor, follow their guidance, which may not follow the standard to the letter, but makes more sense. Other folks are unlikely to notice the issue in the first place, but your auditors will.

Don’t miss Elizabeth’s session, “Indecent Disclosures: Polishing and Perfecting Disclosures under ASC 718,” at the 19th Annual NASPP Conference.

Don’t Miss the 19th Annual NASPP Conference
The 19th Annual NASPP Conference will be held from November 1-4 in San Francisco. With Dodd-Frank and Say-on-Pay dramatically impacting pay practices, you cannot afford to fall behind in this rapidly changing environment; it is critical that you–and your staff–have the best possible guidance. The NASPP Conference brings together top industry luminaries to provide the latest essential–and practical–implementation guidance that you need. This is the one Conference you can’t afford to miss. Don’t wait–the hotel is filling up fast; register today to make sure you’ll be able to attend.