Ask the EASi Experts: Accounting
Gordon Hillegas is one of the founders of EASi. Earlier in his career he served as a division controller of an affiliate of Corning Inc., a financial systems analyst at a large Midwestern-based software company, over ten years in private company securities valuation as an Accredited Valuation Analyst (AVA) with the National Association of Certified Valuation Analysts (NACVA) and over ten years of work in the area of equity compensation accounting. He also was a former vice president at Bank of America in charge of the bank's domestic and international employee benefits program at the bank's San Francisco headquarters. Gordon responds to questions about the accounting aspects of US GAAP for equity compensation with a focus on the output (values) that should appear in various reports such as expense and deferred tax accrual.
Please note that this Q&A is a general discussion of the topic and it shouldn't be construed as a complete discussion of applicable issues. laws, regulations and accounting standards. Please work with your company's advisors to understand your company's interpretation of any relevant issues. EASi does not offer taxation, legal or accounting advice.
Deferred tax is accrued over the entire vesting period. The deferred tax associated with the financial basis expense accrual is reversed upon release of the shares when the income tax liability of the awardee and the tax benefit to the company is then determined.
The unamortized expense is recognized in the period of the cancellation.
Expense is to be calculated on a mark-to-market basis (revalued each reporting period) prospectively from the date of the change in status as if the option was newly granted to a nonemployee. The unamortized expense on the option prior to the change in status is not reversed, however.
Unvested RSA shares are recognized for dilution in the Treasury Stock method. They are included in the denominator for basic EPS once vested.
Yes. The shares are deducted from Authorized but they are not considered outstanding for dilution purposes.
Performance shares are included in the Treasury Stock method as well based on the target shares used for expense accrual.
According to Barbara Baksa at NASPP in one of her latest blogs, these shares are treated as a repurchase to Treasury Stock. That is the position I agree with also.
Where a vesting schedule is front-loaded as in your example, a pure straight line amortization cannot be used due to the FASB rule that the expense in at any date must at least equal the shares vested as of that date. It would have to be amortized on the ratable method where the expense for the shares that vest in each tranche are recognized. The EASi system automatically makes that adjustment to the accrual when it recognizes the front-loaded vesting schedule.
In brief, single life valuation calculates the fair value of the award over the last vesting tranche, that is to say the expected life of the award for Black-Scholes purposes. Multiple life treats each vesting tranche as if it were a separate award and calculates a fair value for each tranche.
The entire fair value (single life or sum of the tranches fair value) can be amortized on a straight line basis or based on the individual tranche values. The accrual method is therefore independent of the valuation method.
The multiple life method will generally produce a lower fair value since the shorter expected lives of the individual tranches apply. The single life method will have a comparatively longer expected life and therefore a higher fair value.