Friday, December 15, 2017

DTA Updates for Tax Reform – A New Wrinkle

DTA Updates for Tax Reform – A New Wrinkle
A client pointed out to me yesterday, that should Tax Reform pass on or before December 31, 2017, our DTA balances will all need to be adjusted.

A Quick Review
DTA stands for Deferred Tax Asset, the accounting way to anticipate the tax deduction your company will get when your non-qualified awards settle. As you already know, when NQs are exercised or when RSUs are released, your company receives a tax deduction in the US and potentially in some other jurisdictions as well. To anticipate this, your company takes the expense that you book for NQs, RSUs, and RSAs for the jurisdictions in which you are entitled to a tax deduction at settlement, multiplies that by your corporate tax rate and books that amount to DTA. This is why your tax group asks you for an expense report grouped by grant type and country. Then when the shares are exercised or release (or NQs expire), the DTA is reversed because you are no longer anticipating a tax deduction.
Private companies often do not book a DTA. Companies in a Net Operating Loss (NOL) position often skip this step as well.

What’s the Issue Again?
So, under Tax Reform, if the new tax rates don’t take effect until 2019, DTA balances will take on a new level of complexity, since we will have one corporate tax rate for shares we expect to vest and settle in 2018 and a different tax rate for those that will settle after 2019.
For those shares vesting in 2019 and beyond, this is an easy bifurcation when you do your regular DTA balance at the end of the year. Just designate those tranches with a formula in Excel and when you summarize the DTA on the books, summarize these tranches into a separate category. Multiply the 2018 amounts times your current corporate tax rate (often 40% ish). Multiple the 2019 amounts times the new tax rates (20%? 30%? TBD).
For those of you that still have a substantial number of options outstanding, it’s likely you will continue to use the current tax rate for your vested options, since it’s difficult to predict when they which settle and under which tax rate they will fall.
Dust off those spreadsheets, or talk to your vendor to make sure they are getting ready for this change!


For more information on DTA Balance Services from Equity Plan Solutions, please contact us at info@equityplansolutions.net

Wednesday, November 15, 2017

Private Companies! It's Not Too Late to Dump Your Forfeiture Rate!

(Please forgive the formatting and spacing issues, blogger creates challenges when formatting text.)
It's not too late for you private companies! You really, really, really, should consider dumping your forfeiture rate! It will make your audits easier and faster, and therefore your life better. Every company we've worked with that has adopted this change is glad they did. And it's not hard, and it doesn't take much time.

For public companies, the ship has sailed. They were forced to adopt earlier this year, and make the one-time election to keep or eliminate their forfeiture rates. But for private companies, there is still time! Private companies must adopt for their first fiscal period that begins after 12/15/2017! So many of you have until 3/31/2018 to calculate the variance and book the true up. You won't be sorry!

How to Dump Your Estimated Forfeiture Rate

Now how do you calculate the true up to book? 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 the total).
The difference is your true up amount or adjustment. 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. (But ping us and we can explain that as well.)

Why life-to-date?
You ask: "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, 2017 for many companies.

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

The approach we’ve used thus far with all our clients 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 grant. Please ensure that EVERY grant in your system is on this tab. On this tab you pull in expense from tab 1 and tab 2 and compares them in a “Variance” column. Then add a “Reason” column that categorizes the grants into (generally) three categories:
  1. Fully Vested, No Cancellation:
    These grants should have no expense variance. Any grants with no future vesting should have been trued up to actual expense on the final vest date.
  2. Canceled:
    These grants should have no expense variance (unless you are using True Up at Vest).
  3. Still Vesting, No Cancellation:
    All grants should have higher expense on the Without Forfeiture Rate tab. 
You could assign these categories by using formulas. However, we 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, we 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. Have at it! And have fun!

Tuesday, September 6, 2016

The Devil's in the (Flux Analysis) Details

The Devil's in the (Flux Analysis) Details

In my last blog post, we discussed the six most common reasons for equity compensation expense to vary from reporting period to reporting period. But... what if you have a grant that falls into one of those categories and the "flux" (variance) is not the variance you expect?

For example, what if you have a grant that was granted last period. You expect the expense to be higher for the current reporting period because it is the first complete period of expense. But what if the opposite is true? The prior period's expense is higher than the current? 

Hence my list of "exceptions" to the "rules" from the last post - we expected higher and we got lower, or we expected lower and got higher, OR we expected lower and it was about the same... 

(Please note that not all stock plan systems calculate expense in the same way, so these exceptions may or may not pertain to the expense shown on your expense report.) 

Reason for Variance
Impact on Expense
Explanation
Prior Grant - Catch Up on Grant Date
Decrease
In some systems, when grants are made in the prior quarter but they have more expense in the prior quarter than the current quarter, that is usually due to a catch up of expense on the grant date for grants with a Vest Start Date (sometimes called a Vest Base Date) prior to the grant date.
Termination - Extended Time to Cancel
Not much variance
When grants with terminations in the prior or current periods do not show a reversal of expense in the period of termination, this is sometimes due to a continued vesting due to an employee status change to consultant. 

Expense will continue, as is correct, but for flux analysis purposes, these grants do not produce “expected results” for terminations and so should be categorized differently.
ISO / NQ Split
Increase or Decrease
When expense is very different from period to period and it is not due to one of the reasons above, it may be from a grant that was part of an ISO/NQ split (ISO grants in excess of the $100K ISO exercisability limitation are split into an ISO and a NQ grant in some systems).

In these cases, the vesting can be very uneven, which may result in very uneven expense as well. The variance can be positive OR negative.

However, just because a grant is an ISO/NQ split does not mean it should immediately fall into this category. If it is a new grant or a current termination, generally those factors will be the main cause of the expense variance, not the fact that it is an ISO/NQ split. So this should be one of the last categories analyzed.
In my next post we'll discuss some common excel tips and tricks for completing your flux analysis quickly and easily. 

Thursday, September 1, 2016

How to Do a Flux Analysis

How to Do a Flux Analysis

First, what IS a flux analysis? In my world of accounting for equity compensation, very simply, it is an analysis of the changes to equity compensation expense from period to period. 

Why did my company's stock plan expense go up by 15%?
Why did my company's stock plan expense go down by 20%?

Inquiring CFOs want to know!

Generally, I see these performed at the grant level and the grants are categorized into nine or so categories, which explain the increase or decrease in expense. We will cover six of these in the table below, and another three in my next blog. 

Most of the time and, depending on the stock plan system you use, variances in expense on the grant level are due to a few simple factors:




To quantify the impact of these factors, you simply put together the key information about each grant:

  • Grant Date
  • Cancel/Termination Date
  • Final Vest Date
  • Shares Outstanding
  • Shares Vested
  • Shares Unvested
  • Prior Period Expense (estimated forfeiture adjusted)
  • Current Period Expense (estimated forfeiture adjusted)
In many systems, you can pull this information together by running three reports:
  • Grant Summary / Personnel Summary
  • Prior Period Expense report
  • Current Period Expense report
I drop all three reports into a single spreadsheet and pull the expense information into the Grant Summary tab by adding columns with an index/match or sumifs. 

Then I add a variance column that compares prior expense to current expense. I always subtract prior from current. 

Then I add a "category" or "reason" column, which I begin to populate by first filtering the data for the various variance causes listed above (e.g. filter for grant date in the current period, and add "Current Period Grant" in the reason column for all those grants). 

However, you should also ensure that all the grants in that category have the "expected outcome" for that category (in the example above, the expense is greater than in the prior period). So after filtering for the grant attribute (grant date in the current period), you should also filter the variance column for the expected result (variance is positive). Then you add the reason to the reason column by pasting down the column. 

Some grants will fall into more than one category, but you want to categorize based on the primary reason for the expense variance. As you begin each variance category, first filter for reason = blank so you don't continually re-categorize the grants. 

In some cases, the variance will NOT be as expected, more on that in the next blog entry... 

Wednesday, January 30, 2013

Missing Exercises?



Question:  
Why doesn't the number of shares exercised on my Tax Accounting report (Tax Benefit Reconciliation in Equity Edge) match the number of exercises on the Exercise report?

Answer:  
If you have ISOs, this is usually the culprit. As I'm sure you all know already, ISO exercises do not produce a tax deduction for the company. Their DISPOSITION (if it is disqualifying), produces the tax deduction, and therefore their disposition, not exercise, appears on this report. So if you try to match exercises from the exercise report to exercises from a tax accounting report, this is often the reason for the mismatch.

Monday, August 27, 2012

Equity Edge: Saving a Copy of Expense Allocation - Recognition - Audit Export View

How many of you who are Equity Edge users consistently save off a copy of your Audit Export view of the Expense Allocation - Recognition report EACH reporting period?

If not, I'd highly recommend you get into the habit, it will ease things greatly if/when you ever get into a circumstance where you have to "prove out" how the estimated forfeiture rate was being applied to your expense.

We are helping a client convert systems and this very sort of question has arisen, but of course the client doesn't have the supporting detail from their old system, only the summary and can only show the forfeiture rate applied at the group level. We can still get the job done, but the soft copies of the details of the application of the forfeiture rate would reduce the amount of effort significantly.

This "Audit Export" report view feature was added in 7.0 or 7.1, I can't remember which. And is a terrific tool for a wide variety of reasons. You can audit nearly ALL of the report calculations with the data on the report. And the exceptions to that "almost all" rule are very rare exceptions. No more "black box" expensing, you can see exactly HOW and WHY Equity Edge calculated the expense that it did. Easy, peasy, lemon-squeezy.

If you have leading zeros on your grant numbers:
Remember to save the export into CSV format, not XLS or XLSX. Then rename the CSV to a .TXT extension before you open it will Excel so that the Text to Data wizard will open automatically and you can then specify the "text" data type for the Number column so that you preserve those leading zeros on your grant numbers.