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...