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. 

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!