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Sunday, November 22, 2009 |
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Complex Technical Hurdles Faced by U.S. Companies in Implementing SFAS 123R By June 15, 2005
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- Research, evaluation, negotiation and selection of commercially-available Binomial Model consultants and software products that can handle company-specific needs, including:
- Broad-based equity programs;
- Monthly vesting schedules;
- Multiple option grant terms;
- Over 125 job classification levels;
- Foreign workers in many nations;
- Affiliate restrictions.
- Programming, testing and customizing of the Binomial Model software with the desired functionality to be fully functional before June 15, 2005.
- The Binomial Model vendor will have to analyze and integrate data from disparate company-specific databases (e.g. employee data stored in Human Resources vs. stock option data in Equity Edge)
- The Binomial Model vendor will have to determine what information can be used to calculate the assumptions (i.e. predictive factors) for input into the Binomial Model, as follows:
- Exercise behavior by gender, age and various job classification levels;
- Exercise behavior at various stock prices;
- Exercise behavior of affiliates (who receive a proportionately large share of the options and who are subject to closed trading window periods);
- Multi-option approach with graded vesting up to 10 years in the future under various scenarios for each option grant;
- An appropriate range of volatility, expected life and risk-free rates for multiple expected terms including affiliate grants;
- Eividend growth rate forecasts up to 10 years even though no approval has been obtained from the Board of Directors for such assumptions;
- The effect of post-vesting transferability restrictions on exercise behavior;
- Exercise behavior of international employees influenced by cultural differences, tax or other regulatory differences, and currency restrictions.
- The Binomial Model vendor will be required to merge and analyze data from separate databases because certain data cannot be extracted from Equity Edge due to software limitations, including, but not limited to the following:
- Accurate historical exercise information is not available with graded (monthly) vesting;
- Historical information about each employee's job level is not contained in the Equity Edge database;
- Historical exercise information cannot be segregated by specific groups (e.g., officers and directors, non-U.S. locations, etc.);
- Historical exercise information cannot incorporate blackout periods for officers and directors and other selected employees;
- 10b5-1 transactions cannot be segregated from other transactions;
- Historical forfeiture information is not accessible, including:
- Vested or unvested in-the-money options that were forfeited
- Vested or unvested underwater options that were forfeited
- Certain historical employee demographic information is not contained in any Company database, such as past country(ies) of residence, past job classification(s), and past affiliate status.
- Certain relevant historical data will never be available and therefore the use of historical data will be incomplete.
- Companies that have conducted spin-offs may find that historical exercise information prior to the spin-off is not accessible and there is no guidance in SFAS 123R or SAB 107 to assist with this problem.
- The Company's auditors must understand and be able to audit the methodologies and underlying assumptions used to develop the factors and variables that are input into the Binomial Model.
- The Company and the Company's outside auditors must test the Binomial Model vendor's product, including its customized analysis of the limited amount of available data, to verify that the product will be auditable by both the Company and the Company's outside auditors.
- The Company must develop, test and implement a database that can be used by the Tax Department to calculate quarterly tax entries that can:
- Interface with Equity Edge;
- Calculate the deductible temporary difference and subsequent increases and decreases in that temporary difference for each option grant for every employee;
- Track the deferred tax benefit recorded and the tax benefit ultimately realized for each option transaction for every employee;
- Calculate changes in the deferred tax benefit that should be recorded in the P&L versus the portion that should be recorded in stockholders' equity (on a transaction-by-transaction basis);
- Calculate the historical Additional Paid-In Capital ("APIC") pool amount as of the FAS 123R implementation date.
- The Company must populate the Equity Edge database with additional employee information (i.e. department codes) in order to properly allocate compensation cost among the various income statement expense categories.
- The Company must populate the Equity Edge database with additional employee information (i.e. retirement eligibility) and establish a separate process in order to properly recognize compensation expense for employees who are eligible for retirement benefits at the time of grant.
- The Company must develop a process to calculate and record the additional expense, if any, related to option modifications.
- The Company's historical exercise factor may not provide an accurate indicator of future exercise behavior or the expected term of future grants of stock options. In that case, despite the lack of guidance in SFAS 123R and SAB 107, the Company must establish a methodology for determining and tracking an exercise factor or other element(s) that could be used to predict future exercise behavior that appropriately relies on historical experience as well as other factors that can be shown to have a close correlation with early exercise behavior.
- The Company must develop a process to track disqualifying dispositions of stock purchased under the Employee Stock Purchase Plan and match them to the original purchases in order to properly account for the related deferred tax assets and realized tax benefits.
- The Company must develop, document and test additional internal processes and controls related to the administration of SFAS 123R for Sox 404 compliance.
- The Company and its auditor must determine the appropriate treatment of excess tax benefits from the exercise of employee stock options with regards to employees of business units that were discontinued or disposed of because the guidance in SFAS 123R and SAB 107 is not clear on this point.
- Current IRS regulations require the sharing of the cost of stock option compensation between related parties in a cost-sharing agreement. The IRS provides for alternative measures of the amount to be shared between the parties. The current guidance is unclear as to the application of FAS 123R to these different cost sharing arrangements. Several different interpretations have been identified that would arrive at substantially dissimilar results as they relate to the calculation of the APIC pool (excess tax benefits).
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