PricewaterhouseCoopers has published a summary of SEC comments on stock compensation (“2013 SEC Comment Letter Trends: Employee Stock Compensation,” available in the NASPP’s Surveys & Studies Portal). The comments were made in the course of the SEC’s review of various types of public filings (mostly Forms S-1, but also some Forms 10-K and other filings). I thought it would be interesting to take a look at what PwC found for today’s blog.
Companies Targeted
The majority (79%) of the companies to receive comments were technology, pharmaceutical, and life science companies. But don’t read anything into this–as noted above, the majority of the SEC’s comments were on S-1 filings, and these industries represented the majority of IPOs last year (particularly IPOs where employees held substantial amounts of stock compensation).
Areas Commented On
81% of the SEC’s comments related to information on stock compensation included in the MD&A. Of the comments related to the MD&A, 90% related to the discussion of critical accounting policies, et. al., for stock compensation. Based on the sample comments excerpted by PwC, it seems that many of these comments requested more information on the valuation of the company’s stock on grant dates.
Types of Comments
PwC found that, overall, 50% of the comments related to disclosure, 41% related to valuation, and 9% related to other accounting issues. Of the 41% of comments related to valuation, many of these seem to relate to the valuation of the company’s underlying stock on grant dates, rather than the valuation of stock options. Also, a little over one-third of the comments that PwC classified as disclosure-related were on the disclosures related specifically to valuation. Another 29% were on disclosures related to IPOs; many of these comments focused on valuation of the company’s stock (specifically on the differences between the most recent valuation and the IPO price).
Accounting Recognition Comments
Not much here. PwC notes that:
“Interestingly, we did not come across many comments related to some of the more complex areas of stock compensation accounting. For example, we saw only one comment on classification of awards as equity verses liability, no comments on expense attribution methodology, one comment on award modifications, and no comments on determination of the grant date.”
Key Takeaways
Overall, it seems that the SEC either (1) focused primarily on stock valuation-related issues in their review of stock compensation info in public filings, or (2) focused on everything but simply didn’t find much to comment on beyond the stock valuation issues.
If you are a public company, this is probably good news. Because your stock is publicly traded, so long as your grant dates are accurate, there’s not a lot for the SEC to question with regards to your stock value. But if you are a private company, you’ll want to make sure your house is in order when it comes to grant date stock valuations.
By now, you are probably finishing off any remaining leftovers from Thanksgiving. On that theme, I have a few leftover items for the blog and now seems like a good time to use them up. Sort of like making a casserole out of turkey, mashed potatoes and stuffing, but not quite as tasty.
Update on Proxy Disclosure Lawsuits On November 6, I blogged about plaintiffs’ attorneys that are now bringing lawsuits alleging that companies’ disclosures related to their stock plan or Say-on-Pay proposals are inadequate (“Martha Stewart and Your Proxy Statement“). The lawsuits seek an injunction to delay the shareholder votes on these proposals (which, in effect, delays the annual meetings); companies targeted by these attorneys are faced with settling and paying out plaintiffs’ attorney fees in the six figures (up to $625K) to avoid a delay.
Last week, Mike Melbinger provided an update on this issue in his Compensation Blog on CompensationStandards.com. To date, 20 companies have been targeted and at least six have settled, meaning that they agreed to make additional disclosures and pay fees to the plaintiffs’ attorneys. At least one company (Brocade Communications) also had to delay the vote on their stock plan proposal (although they did hold their annual meeting on time). At least three companies (Clorox, Globecomm Systems, and Hain Celestial) got courts to reject the injunction. And Microsoft got the law firm that filed the complaint (Faruqi & Faruqi, which has initiated most of these suits) to withdraw it. The article “Insight: Lawyers Gain from Say-on-Pay” Suits Targeting U.S. Firms,” published by Reuters on November 30, has a good summary of the various suits.
This is an opportunity for you, as a stock plan administrator, to demonstrate the value that you bring to the table. Make sure that your legal department is aware of the potential for these lawsuits, so that if your company is targeted, they aren’t caught offguard. You also might want to forward the memo we’ve posted from Orrick to legal (“New Wave of Proxy Statement Injunctive Lawsuits: How to Win & Prevent Them“), which include thoughts on strengthening your disclosure so they will be more likely to withstand one of these lawsuits.
IFRS: Hot or Not? An article published on November 13 in Accounting Today (“SEC Still Has Reservations about IFRS” by Michael Cohn) reports on comments by SEC officials at FEI’s 31st Annual Current Financial Reporting Issues conference on where the SEC stands on IFRS. The upshot is that SEC researchers have identified a number of concerns with adopting IFRS in the US and that the SEC is still taking a wait and see approach. Some of the areas the researchers looked at were the cost of conversion, whether or not IFRS makes sense for US capital markets, the interpretative process, the impact on private companies, investor understanding, and what our exit strategy might be if the US adopts IFRS and it backfires. Based on this report, I’d say we still have a long ways to go before we are under IFRS (or some sort of equivalent) here in the US.
Of course, things may change now that there will be a new chair at the SEC.
Even the SEC Makes Mistakes The next time someone finds a typo in something you’ve written, you can point out that you are in good company. In his blog for Allen Matkins, Keith Bishop notes a number of errors on the Form 10-K posted to the SEC website (“The SEC’s Form 10-K: ‘In Endless Error Hurled,'” April 11, 2012), including cites to regulations that don’t exist and outdated instructions. I feel a lot better now about the myriad typos I’m sure can be found in my blogs. If the SEC isn’t perfect, how can the rest of us be expected to be error-free?
More Than You Ever Want to Know About Stock-for-Stock Exercises I spent an hour or so today drafting a 1,200-word essay in response to a question in the NASPP Discussion Forum about stock-for-stock exercises. I’m so pleased with my response that I wish I had another use for it. But I don’t, so I’m mentioning it here in the hopes that a few more people will read it. If you want to understand what a tax-free exchange of property is (and what it isn’t), check out Topic #7391.
Shout-Out Finally, a shout-out to Sara Spengler at Facebook for suggesting the Thanksgiving tie-in for today’s blog entry.
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.
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