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!

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