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Workforce restructuring: Navigating the accounting complexities · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought leadership from PWC.
• 0:06
  SPEAKER_01: Welcome back to PWC's The Counting Podcast.
• 0:09
  SPEAKER_01: I'm Heather Horn.
• 0:11
  SPEAKER_01: Thanks so much for joining me for our final June episode in our Tuesday series in which one of our all-star podcast guests takes over the podcast, picking the topics for the month, and joining me on all the episodes.
• 0:25
  SPEAKER_01: This month, our takeover guest is Angela Ferguson, a PwC national office partner who specializes in revenue and compensation.
• 0:34
  SPEAKER_02: The advice is that if you are going to have one of these events, that you definitely want to break down into pieces.
• 0:42
  SPEAKER_01: That was Angela sharing some timely perspectives on voluntary and involuntary termination benefits and modifications to stock-based compensation when your company is restructuring.
• 0:54
  SPEAKER_01: Given the current economic environment and the competitive labor force, you don't want to miss this.
• 1:00
  SPEAKER_01: So let's get started.
• 1:07
  SPEAKER_01: Angela, welcome back to the podcast.
• 1:09
  SPEAKER_01: So nice to have you on.
• 1:10
  SPEAKER_01: And sort of exciting to be talking about something outside of our normal realm of conversation, which is normally revenue.
• 1:17
  SPEAKER_01: But I know today we're going to cover something related to employee benefits.
• 1:22
  SPEAKER_01: And this is another area where you spend a lot of time.
• 1:24
  SPEAKER_01: And I know we're increasingly getting questions in this area.
• 1:28
  SPEAKER_01: And it's funny because when I was looking at the topics for this month, I was thinking we just did a podcast on restructuring.
• 1:37
  SPEAKER_01: However, that was in 2020, three years ago.
• 1:39
  SPEAKER_01: So obviously, time flies very fast.
• 1:41
  SPEAKER_01: And it was definitely a good time to revisit this, just given, you know, all we're seeing in the news about companies looking at different ways to reduce cost and including reducing their workforce.
• 1:52
  SPEAKER_01: So lots of accounting complexities in this area.
• 1:55
  SPEAKER_01: But maybe before we get into some of the details, it might be helpful to just give a summary of what we're planning to cover today.
• 2:03
  SPEAKER_02: Sure.
• 2:03
  SPEAKER_02: And part of the complexity here is that there are several different models that you might have to apply in this area.
• 2:10
  SPEAKER_02: So I'm going to walk through all the all of the different models, and we'll start with severance payments to employees, which are typically going to be cash payments.
• 2:20
  SPEAKER_02: And there are three overall models in this area.
• 2:24
  SPEAKER_02: For involuntary terminations, you have a model for one-time benefits, and then a separate model for benefits that are provided under an existing plan.
• 2:35
  SPEAKER_02: And then there's a third model if you have voluntary terminations that include payments to the employees.
• 2:43
  SPEAKER_02: And then after we talk about severance payments, I'm going to hit on some common modifications that we see to stock-based compensation awards, because often when you have workforce reductions, you also will make some modifications to the awards that those employees hold.
• 3:00
  SPEAKER_01: All right.
• 3:00
  SPEAKER_01: So Angela, I remember from our last podcast, but actually even more so from personal experience, that one of the complexities here is that a single event, so, like for example, single reduction workforce actually could involve multiple types of benefits and then application on multiple models.
• 3:20
  SPEAKER_02: That's right.
• 3:21
  SPEAKER_02: So when we're going through these, it's not that you're trying to figure out which of the ones applies to a certain event.
• 3:28
  SPEAKER_02: It's looking at what benefits are being paid and then working through the model that applies to that type of benefit.
• 3:35
  SPEAKER_01: All right.
• 3:36
  SPEAKER_01: Well, and maybe this is a stretch too far, but I feel like, Angela, you are used to looking at single events as being lots of parts because of your revenue contracts, which often can have different parts for a single.
• 3:50
  SPEAKER_01: There you go.
• 3:51
  SPEAKER_01: So there you go.
• 3:52
  SPEAKER_01: That's the thing the advice, that's the quote for this podcast.
• 3:55
  SPEAKER_01: All right.
• 3:55
  SPEAKER_01: So we'll definitely get into some of those examples because I do think that is, I know, like I said from personal experience where it's easy to get tripped up.
• 4:04
  SPEAKER_01: But first, let's walk through each type of benefit and maybe starting with those one-time involuntary benefits, uh, which is, I think, typically what people would be thinking of when they're thinking of severance payments.
• 4:16
  SPEAKER_01: And some ways I think it's most straightforward to understand as well.
• 4:20
  SPEAKER_01: Sure.
• 4:20
  SPEAKER_02: So in this scenario, a company is giving severance payments to employees that are being involuntarily terminated as part of a one-time program, meaning that there's not an existing plan of what the employees would get upon termination.
• 4:37
  SPEAKER_02: The company has decided to do the reduction in force and has decided on what benefits they plan to give in this one-time event.
• 4:46
  SPEAKER_02: So before a company is going to account for the one-time termination benefits, there are four requirements that have to be met.
• 4:55
  SPEAKER_02: First, management with appropriate authority has to commit to the plan.
• 5:00
  SPEAKER_02: That plan has to have a certain level of detail, such as the number and type of employees that are going to be impacted.
• 5:07
  SPEAKER_02: Third, the significant changes to that plan have to be unlikely.
• 5:12
  SPEAKER_02: And then the fourth one is really the one that is probably most important that we pay the most attention to, is that the terms of the plan must be communicated to employees.
• 5:22
  SPEAKER_02: And the reason for this is because the concept of recording a liability, there needs to be an understanding between the employer and the employee about what the employee would be entitled to if they are involuntarily terminated.
• 5:39
  SPEAKER_02: And in this case, we have a one-time plan.
• 5:41
  SPEAKER_02: So the employee would not have any previous expectation or knowledge of what they would receive upon being terminated.
• 5:49
  SPEAKER_01: So, Angela, when you talk about communicating to the employee, I know often somehow the timing of these seems to coincide with the end of the quarter or the end of the period.
• 5:59
  SPEAKER_01: But does that mean you actually need to be communicating with each individual employee or what's required to meet that criterion?
• 6:08
  SPEAKER_02: So you don't have to communicate to each individual employee.
• 6:12
  SPEAKER_02: You don't have to even know exactly who's going to be terminated under the reduction and force.
• 6:18
  SPEAKER_02: It only needs to be a broad communication to everyone who could be affected about what the severance benefits would be if they are part of the involuntary termination.
• 6:30
  SPEAKER_02: So that those employees would understand that if they are affected, you know, what would the benefits be that they would be entitled to?
• 6:39
  SPEAKER_02: So once this communication occurs, we have what we call our communication date.
• 6:44
  SPEAKER_02: You know, and the standard refers to that point in time as being when you would account for these severance payments.
• 6:52
  SPEAKER_02: And once you have the communication date, you're going to recognize expense immediately if there's no further service required beyond what we call a minimum retention period.
• 7:04
  SPEAKER_02: So that is 60 days, which is a bright line set by the standard.
• 7:09
  SPEAKER_02: We don't often see that.
• 7:10
  SPEAKER_02: Which is honestly probably helpful, at least in this case.
• 7:13
  SPEAKER_02: So 60 days, unless there is some other legal notification period, but usually we end up using 60 days.
• 7:21
  SPEAKER_02: In that case, then you recognize the expense immediately.
• 7:24
  SPEAKER_02: However, if the employee must provide service beyond 60 days to get those severance benefits, then the expense is recognized prospectively over that service period.
• 7:37
  SPEAKER_01: So then, Angela, that's helpful on the uh communication plan and who needs to be communicated to.
• 7:44
  SPEAKER_01: But one other thing that really stuck with me when you were speaking on your originally talking about the criteria was that there was no expectation of payment.
• 7:54
  SPEAKER_01: And I think you're going to tell me this goes into the next category we're about to talk about because often, particularly I think if you're dealing with you know professional employees, you may have where, oh, well, they are, you know, they have their employee agreement, actually says they're going to get like a year of severance if they're terminated.
• 8:14
  SPEAKER_01: So, like I said, I think that's in the next category.
• 8:17
  SPEAKER_02: Great segue.
• 8:18
  SPEAKER_01: Okay, perfect.
• 8:19
  SPEAKER_01: But actually, let me ask one more question before we segue, which would be when you say involuntary, then it's truly involuntary.
• 8:27
  SPEAKER_01: This is not someone raising their hand and saying, Oh, I'm going to retire anyway, and so I'm going to retire early.
• 8:33
  SPEAKER_01: But this is someone who's like, sorry, Angela, you, you know, we're terminating your employment.
• 8:40
  SPEAKER_01: Right.
• 8:40
  SPEAKER_02: It would be like a unilateral decision on the company's side.
• 8:44
  SPEAKER_02: Right.
• 8:44
  SPEAKER_02: So yeah, we'll get to voluntary terminations, which would include like an early retirement kind of benefit later on.
• 8:51
  SPEAKER_01: Okay, perfect.
• 8:52
  SPEAKER_01: I'm ready to jump ahead, as you can see.
• 8:53
  SPEAKER_01: So let's go back to my person who has this uh expectation that or they have something in their employee agreement or otherwise, which is I think the situation where there's an existing plan.
• 9:05
  SPEAKER_01: Although it's interesting because I think absent this, I wouldn't have necessarily thought all these individual agreements were a plan.
• 9:12
  SPEAKER_01: But how does the accounting work?
• 9:15
  SPEAKER_01: And then we can talk about more about this plan.
• 9:17
  SPEAKER_02: Sure.
• 9:18
  SPEAKER_02: So I mean, when we think of what is an existing plan, that could be something written down.
• 9:23
  SPEAKER_02: It could be an overall policy, it could be in an individual's employment agreement, but it doesn't actually have to be written.
• 9:33
  SPEAKER_02: It could be what we call a substantive plan, which is um just the fact that the employee has a reasonable expectation of the benefits that they would receive upon involuntary termination.
• 9:46
  SPEAKER_01: All right.
• 9:46
  SPEAKER_01: So then, Angela, the first thing that comes to mind for me in thinking about this substantive plan would be the company does these types of involuntary terminations every few years.
• 9:58
  SPEAKER_01: And every time they do it, they pay at least a year of severance.
• 10:01
  SPEAKER_01: But I'm sure there's other more specific factors we should be thinking about.
• 10:05
  SPEAKER_02: No, I mean that was that was pretty good.
• 10:07
  SPEAKER_02: I mean, it is it is based on past practice, right, typically.
• 10:11
  SPEAKER_02: And that that would be the fact that the company has had involuntary terminations in the past, that they had a consistent type of benefit that they paid out for those involuntary terminations.
• 10:23
  SPEAKER_02: And then the other thing that you would consider is how has it been communicated to employees?
• 10:28
  SPEAKER_02: So you're all you're trying to get back to whether the employee would have this reasonable expectation of, okay, if I'm part of the layoff, like I'm going to get X amount of weeks of pay for my years of service based on what the company has done in the past.
• 10:47
  SPEAKER_02: So, I mean, this does come up, and I am, you know, we've all seen situations where a company has done multiple involuntary terminations in a short period of time.
• 10:57
  SPEAKER_02: So it is possible to have that unwritten or substantive plan.
• 11:02
  SPEAKER_02: I would say though, it's probably more common that a company would actually have a written policy or have something written in the employment agreement that would determine what an employee would be entitled to if they're involuntarily terminated.
• 11:17
  SPEAKER_02: And like you said, it's often something around you get X number of weeks of pay based on X number of years of service, right?
• 11:25
  SPEAKER_02: That would be pretty, pretty common way to lay out the terms of the benefits.
• 11:30
  SPEAKER_01: And Angela, you just made the point that it's like in a relatively short period of time.
• 11:34
  SPEAKER_01: And by that, are you saying if the company had one involuntary termination 10 years ago, that maybe employees would be thinking about that, but that may not necessarily mean you have a substantive plan.
• 11:47
  SPEAKER_02: Right.
• 11:47
  SPEAKER_02: Well, it's not gonna be like one strike, you're out, or anything like that.
• 11:50
  SPEAKER_02: But again, it's gonna also depend on how that's communicated to employees.
• 11:55
  SPEAKER_02: If that's communicated in a way that they would expect, like, okay, this is what the company's gonna do from now on, they might have a reasonable expectation.
• 12:04
  SPEAKER_02: So I it's really it's it depends.
• 12:06
  SPEAKER_02: I know.
• 12:06
  SPEAKER_02: I'm surprised, right?
• 12:07
  SPEAKER_01: No, no, no.
• 12:08
  SPEAKER_01: I love it.
• 12:08
  SPEAKER_01: It's a good answer for any accounting situation, it seems like.
• 12:11
  SPEAKER_01: So it's it's good in this situation.
• 12:13
  SPEAKER_01: And then um, one other question for you that because so now we're talking this is different than the one-time benefit situation.
• 12:21
  SPEAKER_01: So, how does that impact the timing of recognition?
• 12:25
  SPEAKER_02: Sure.
• 12:25
  SPEAKER_02: And before I get there, there was one other situation I wanted to bring up is that there are some jurisdictions, especially international jurisdictions, where there might be something mandated by law.
• 12:37
  SPEAKER_02: So even though it's not in the company's policy, it might be known that by law you have to give employees a certain amount of benefit if they're involuntarily terminated.
• 12:47
  SPEAKER_02: So that would also fall under this model.
• 12:50
  SPEAKER_01: And I guess that reminded me then that would be, for example, also like a union plan, maybe would fall into that too, because that's part of the the broader employment agreement there.
• 12:59
  SPEAKER_01: Yep.
• 13:00
  SPEAKER_01: All right, helpful.
• 13:00
  SPEAKER_01: So then, all right, so now let's think about timing.
• 13:03
  SPEAKER_01: How do you think about it in this case where you have a plan, whether that's written or substantive?
• 13:08
  SPEAKER_02: So in this case, we're going to apply the um generally apply the loss contingency model in ASC450, which is the probable and estimable model, which I'm sure we've all heard before.
• 13:21
  SPEAKER_02: So you would be recording an accrual at the time that it becomes probable that you're going to make the payments, and then you can estimate the amount of payments that you would make.
• 13:31
  SPEAKER_02: So as you can imagine, this may very well be an earlier point in time than that communication date that we talked about for the one-time benefits.
• 13:40
  SPEAKER_01: All right.
• 13:40
  SPEAKER_01: Well, if people want to know more about the loss contingency model more broadly, we have an earlier podcast this year with Pat Durvin and Tom Barbieri talking about that, although not specific necessarily to this.
• 13:52
  SPEAKER_01: Now, Angela, how about in this case, do you have to consider potentially future service?
• 13:58
  SPEAKER_02: You do, but it's in a bit of a different way because once it's probable and estimable, you're going to be recording an accrual for what the employee has already earned through their past service.
• 14:12
  SPEAKER_02: So remember, we were talking about it's often you get X amount based on how many years of service you get.
• 14:19
  SPEAKER_02: That's what you would be accruing because they have already earned that amount.
• 14:23
  SPEAKER_02: Now, if the actual termination date is going to be sometime in the future, that employee might earn even more benefits as they continue to work.
• 14:34
  SPEAKER_02: So you would continue to accrue more for future service.
• 14:38
  SPEAKER_02: But it's quite different from the one-time benefit model where it's a purely prospective recognition if you have future service.
• 14:47
  SPEAKER_01: All right, very helpful.
• 14:48
  SPEAKER_01: So then let's go to the other example I also tried to jump ahead to, which is that you have actually voluntary termination benefits.
• 14:58
  SPEAKER_01: So again, I gave the example someone who wants to take early retirement, but I'm sure there's other potentially examples there.
• 15:05
  SPEAKER_02: Sure.
• 15:05
  SPEAKER_02: And we don't necessarily see this quite as much, but this would be, like you said, a situation where uh you may even offer early retirement or just otherwise offer benefits to employees who volunteer to be terminated because you're trying to reduce your workforce.
• 15:22
  SPEAKER_02: And maybe you start with that before you go to the involuntary termination.
• 15:27
  SPEAKER_02: So in this case, you do not account for the severance payments or the benefits until the employee accepts the offer.
• 15:35
  SPEAKER_02: So in this case, because it's not a unilateral action, like we talked about before, you know, both parties have to agree.
• 15:42
  SPEAKER_02: So you do not account for it until you have that acceptance.
• 15:46
  SPEAKER_02: And this comes up often when an offer might be made, like right near the end of the reporting period.
• 15:54
  SPEAKER_02: And so you may even know about some acceptances that come in after period end, but before you report.
• 16:01
  SPEAKER_02: But the guidance is very clear that you do not account for those until the period of acceptance.
• 16:07
  SPEAKER_02: So you would not say, like, push them back, you know, to the prior period or try to estimate some amount of acceptances.
• 16:14
  SPEAKER_02: You do wait until the acceptances occur.
• 16:17
  SPEAKER_01: All right.
• 16:17
  SPEAKER_01: Well, so given all these differences in timing of recognition, definitely sounds like a key to getting the accounting right here is understanding exactly what you're dealing with.
• 16:27
  SPEAKER_01: So is it involuntary, is it voluntary, and then is there an existing plan?
• 16:32
  SPEAKER_01: So, with all of that said, you started by saying often you're gonna see this all together.
• 16:37
  SPEAKER_01: And so, can you give some examples of some like common scenarios we may see?
• 16:41
  SPEAKER_02: Sure.
• 16:42
  SPEAKER_02: And it does come up quite a bit.
• 16:43
  SPEAKER_02: So a couple of times where you might have a mix of different types of benefits, you might have employees that are in different jurisdictions.
• 16:53
  SPEAKER_02: So, like I mentioned, some jurisdictions have maybe laws in place around having to give employees certain benefits when they are involuntarily terminated.
• 17:03
  SPEAKER_02: So you may have employees in some jurisdictions that have a written plan, and then other employees that do not are not under an established plan.
• 17:12
  SPEAKER_02: So they would be under the one-time benefit model.
• 17:14
  SPEAKER_02: So there you'd have a mix of models.
• 17:17
  SPEAKER_02: Another example is that a company might have an existing plan, but then for a particular event, they may decide to top it off, you know, add more as a one-time benefit just for that one event.
• 17:32
  SPEAKER_02: So in that case, too, you would have some level of benefits that fall under the existing plan model.
• 17:39
  SPEAKER_02: And then the incremental benefits fall under the one-time model, and those can be at different times.
• 17:45
  SPEAKER_02: And lastly, you can even have a situation where you have uh involuntary termination, but you might offer a bit of a sweetener to people who agree to be part of a you know to be part of the reduction of force.
• 18:01
  SPEAKER_02: So you might have a part of it that's the involuntary termination benefits, but then the sweetener piece falls under the voluntary termination benefits.
• 18:11
  SPEAKER_02: So again, that might be at a different time.
• 18:14
  SPEAKER_01: So, Angela, let me just clarify that last example.
• 18:17
  SPEAKER_01: So if I am planning to involuntarily uh reduce my workforce, but you say to an employee, okay, if if you accept this, you know, if you kind of um volunteer step up to be one of the thoughts to be one of them, you're going to get this extra payment.
• 18:33
  SPEAKER_01: Then in that case, even that individual employee, the extra payment would be voluntary and the uh the sort of standard amount would be involuntary.
• 18:41
  SPEAKER_02: Well, it's usually like you're going to involuntarily terminate a certain number of people.
• 18:46
  SPEAKER_02: So the accrual is for that.
• 18:48
  SPEAKER_02: And then if the person accepts the voluntary offer, you wait until they accept, but you're going to incur that base amount for the involuntary of the voluntary.
• 18:58
  SPEAKER_02: Yeah, exactly.
• 18:59
  SPEAKER_01: Uh that totally that makes sense.
• 19:00
  SPEAKER_01: So your point here is that you say you're going to terminate 500 people.
• 19:04
  SPEAKER_01: Who those exact people are maybe determined by some of them take this offer?
• 19:09
  SPEAKER_01: But either way, you're terminating 500 people.
• 19:12
  SPEAKER_01: Right.
• 19:12
  SPEAKER_01: Yeah.
• 19:12
  SPEAKER_01: Okay, that's very helpful.
• 19:13
  SPEAKER_01: So definitely a lot to think about there.
• 19:16
  SPEAKER_01: And again, I'll just reiterate that point about making sure you know what you're dealing with.
• 19:21
  SPEAKER_01: But clearly, this is just skimming the surface.
• 19:23
  SPEAKER_01: So on this particular sort of restructuring or termination benefits, where would you go for more information?
• 19:31
  SPEAKER_02: So we cover all of these different models in chapter eight of our pension and other employee benefits guide.
• 19:38
  SPEAKER_02: Don't be fooled by pensions being in the name.
• 19:40
  SPEAKER_02: It covers all sorts of employee benefits.
• 19:42
  SPEAKER_02: And then also in that chapter, chapter eight, you'll find some examples where you have this combination of different types of benefits.
• 19:50
  SPEAKER_01: All right, definitely worthwhile to read that if you're dealing with this.
• 19:54
  SPEAKER_01: So let's switch then to another type of benefit, termination benefit we may see, which is related to stock-based compensation awards.
• 20:04
  SPEAKER_01: And we may often see employees that are being terminated who hold options or have other restrictive stock awards.
• 20:12
  SPEAKER_01: So, what do you do with these when there's reduction in workforce?
• 20:16
  SPEAKER_02: So it's possible that the company will just let these run their course.
• 20:20
  SPEAKER_02: So if you know an employee has unvested awards, they just forfeit those awards.
• 20:25
  SPEAKER_02: However, it's pretty common, especially because it's an involuntary termination, that companies will modify stock-based compensation awards as part of that.
• 20:36
  SPEAKER_02: And they may not do it for everyone, they may do it just more for like upper level, upper level management, but they could also do it for everyone.
• 20:43
  SPEAKER_02: And there's two primary types of modifications that we see.
• 20:48
  SPEAKER_02: The first type of modification is to modify unvested awards to accelerate vesting.
• 20:55
  SPEAKER_02: And then the second type of modification we see is that for vested options, you extend the period of time that employees have to exercise those options.
• 21:07
  SPEAKER_01: All right.
• 21:07
  SPEAKER_01: So I want to come back to the accounting for both of those, but let me ask you a question because you mentioned that this would be involuntary.
• 21:15
  SPEAKER_01: Would this also apply if you had this case where someone took voluntary or that there was an existing plan?
• 21:21
  SPEAKER_01: Or is this specific if there's involuntary terminations?
• 21:23
  SPEAKER_02: Yeah, good question.
• 21:24
  SPEAKER_02: It's not specific to involuntary terminations.
• 21:27
  SPEAKER_02: I guess I was just saying that oftentimes that's when we see make these modifications because it's all part of that package that's you know given to employees as part of being involuntarily terminated.
• 21:39
  SPEAKER_02: However, the same guidance would apply no matter what type of termination it is.
• 21:43
  SPEAKER_01: Okay, that's very helpful.
• 21:44
  SPEAKER_01: So then let's go to your different types of scenarios that you were talking about and the two common ones.
• 21:50
  SPEAKER_01: So the first one would be to modify an unvested award to accelerate vesting, which you can see the benefit from the employee side for that.
• 21:59
  SPEAKER_01: So how do you Handle that.
• 22:01
  SPEAKER_02: So this is what we call a type three modification or improbable to probable modification.
• 22:09
  SPEAKER_02: And this is a situation where the employees would not vest in the awards under original terms because they're being terminated.
• 22:17
  SPEAKER_02: So they would otherwise forfeit the awards, but we're modifying them that in a way that allows them to venture in the awards so that vesting becomes probable.
• 22:28
  SPEAKER_02: So that's the improbable to probable.
• 22:31
  SPEAKER_02: Now the accounting for this modification is that because the original award will no longer vest under the original terms, you reverse any expense for those original awards.
• 22:42
  SPEAKER_02: And then effectively you have a new award that's being granted.
• 22:47
  SPEAKER_02: So that is measured at fair value on the modification date.
• 22:51
  SPEAKER_02: And this could be a higher value or a lower value than the original grant date fair value.
• 22:58
  SPEAKER_02: Now, going back a few years, usually it was a higher value.
• 23:02
  SPEAKER_02: Now with a lot of the market volatility we're having, it could be either, you know, it could be a lower value, which it doesn't matter.
• 23:11
  SPEAKER_02: That's what the model is.
• 23:12
  SPEAKER_02: So it could be less, um, less expense than the original grant date fair value.
• 23:17
  SPEAKER_02: And in this case, you're going to recognize the compensation expense immediately if there's no additional service required, or if there is an ongoing service period, you would recognize it over that remaining service period.
• 23:30
  SPEAKER_01: All right, that's helpful.
• 23:32
  SPEAKER_01: And then when we were talking originally, sticking with involuntary, we had this 60-day period that we were looking at.
• 23:39
  SPEAKER_01: So does that also come into play here?
• 23:42
  SPEAKER_02: Well, we don't have that same 60-day bright line, but there is this concept of whether there's substantive service required.
• 23:50
  SPEAKER_02: So for example, if you are terminating employees and maybe the legal termination date is in the future, but you say, don't bother to come to work tomorrow.
• 24:02
  SPEAKER_02: You know, we don't want you to come back, you're done, then we wouldn't be spreading the expense over some future period because they're really no longer providing service.
• 24:11
  SPEAKER_02: So we would accelerate and recognize all of the expense on the final service date.
• 24:17
  SPEAKER_02: The other point I want to highlight here is that I mentioned that part of this accounting is that you would reverse any expense recorded for the original award.
• 24:27
  SPEAKER_02: Another factor to consider here is that that timing can depend on the company's policy for how they account for stock-based compensation forfeitures.
• 24:39
  SPEAKER_02: So you may remember, may or may not remember, uh, several years ago there was a project on stock-based compensation or simplifications.
• 24:49
  SPEAKER_02: And one of the things that was done in that um in that project is that it gave companies the ability to have a policy to account for forfeitures when they occur instead of estimating forfeitures.
• 25:05
  SPEAKER_01: So I I think I recall, and now I'm trying to stump myself, which we don't do anymore, Angela.
• 25:11
  SPEAKER_01: Don't worry.
• 25:11
  SPEAKER_01: Uh, but is was that in 2016 that project or is it predate?
• 25:15
  SPEAKER_01: You don't know we'll look that up and I'll do a voiceover because now I'm curious.
• 25:23
  SPEAKER_01: So, well, that wasn't stump the guest or host for that matter question.
• 25:28
  SPEAKER_01: I will take a point for getting it right.
• 25:31
  SPEAKER_01: The stock comps implication ASU did come out in March 2016.
• 25:40
  SPEAKER_01: Is there though, with that, uh one approach that's more common?
• 25:44
  SPEAKER_02: It's a little hard to say.
• 25:46
  SPEAKER_02: I do actually see both.
• 25:47
  SPEAKER_02: So it's not like there's one policy that's far and away more common than the other.
• 25:52
  SPEAKER_02: So it is important to understand what is the company's policy because that's going to affect the timing here.
• 25:59
  SPEAKER_02: So if your policy is estimating forfeitures, then you need to update your estimate of forfeitures whenever necessary to reflect the fact that you're expecting to do this reduction in force and therefore expecting employees to forfeit their awards.
• 26:17
  SPEAKER_02: And that would likely mean you need to sort of increase your estimate of forfeitures based you know beyond what you had originally estimated.
• 26:27
  SPEAKER_02: And this could be sometime in you know prior to when the awards are actually modified or when the employees are actually notified that they're going to be terminated.
• 26:37
  SPEAKER_02: So you just again are you on a you're on a schedule of like each reporting period updating that estimate of forfeitures.
• 26:44
  SPEAKER_01: Yeah, definitely seems like it might maybe easier to have the accounting for forfeitures when they occur.
• 26:51
  SPEAKER_01: But I can see pluses and minuses on both, and definitely, definitely sounds like it would be a good idea to refresh on this guidance if you're you're dealing with this situation.
• 27:01
  SPEAKER_02: Absolutely.
• 27:02
  SPEAKER_02: I mean, when you account for the forfeitures when they occur, that can be easier, but it can also be a little counterintuitive because you may actually know that you're gonna do a reduction in force, but you have to wait until the terminations occur.
• 27:18
  SPEAKER_02: So that can be a little bit of awkward accounting as well.
• 27:21
  SPEAKER_02: So yes, definitely recommend going and refreshing on the model if you have this situation.
• 27:26
  SPEAKER_01: And then any other types of factors companies should be thinking about if they're dealing with this situation.
• 27:33
  SPEAKER_02: Yeah, another thing to consider is that we've been talking about modifications, but it's also not unusual to have awards where it's in the terms of the award, there's a provision that if the employee isn't voluntarily terminated, that either all or some of the options will automatically vest.
• 27:53
  SPEAKER_02: So it could be already baked into the terms of the award.
• 27:58
  SPEAKER_02: In that case, it's not a modification when the awards accelerate vesting, it is just a change in the timing of the recognition of the expense, which would be the original grant date fair value expense.
• 28:12
  SPEAKER_02: So in this case, once it's expected that the timing will change, it'll be a shorter period of time.
• 28:19
  SPEAKER_02: You're going to either accelerate the expense all at once if there's no further service, or if there's still some service period, you would be adjusting the timing over the remaining service period.
• 28:31
  SPEAKER_02: And that's done on a prospective basis.
• 28:34
  SPEAKER_01: All right, very helpful.
• 28:36
  SPEAKER_01: And so then just sticking with stock-based comp, you did say that there's another type of modification that's common, which is extending the exercise period, which that interested me.
• 28:46
  SPEAKER_01: So, what's the scenario where we see that and what do you do with that?
• 28:50
  SPEAKER_02: Yeah, so typically when an employee terminates employment, whether voluntary or involuntarily, there's a short period of time that they have to exercise any vested options.
• 29:02
  SPEAKER_02: So this is typically 60 to 90 days.
• 29:05
  SPEAKER_02: Like the term of the award gets truncated upon termination.
• 29:09
  SPEAKER_02: Sometimes an award will have a provision where if you're involuntarily terminated, you get a slightly longer period.
• 29:16
  SPEAKER_02: But in many cases, it's always this pretty short period of time.
• 29:20
  SPEAKER_02: So, what we often see is companies will do a modification to the vested options so that employees have a longer period of time to exercise options.
• 29:31
  SPEAKER_02: And they might do that just because maybe the stock price is a little depressed at the time, and they want to give more of an opportunity for the stock price to potentially go higher before the employees have to exercise their options.
• 29:46
  SPEAKER_02: In this case, this is a type one modification or probable to probable.
• 29:52
  SPEAKER_02: And the reason why it's probable to probable is because the probability of vesting hasn't changed.
• 29:58
  SPEAKER_02: In fact, these options are vested.
• 30:01
  SPEAKER_02: So the calculation of incremental comp is based on the increase in fair value from extending that exercise period.
• 30:11
  SPEAKER_02: And you do get an increase in fair value because if you remember, one of the inputs into an option pricing model is the expected term.
• 30:20
  SPEAKER_02: And then the longer you make that expected term, the more value of the option.
• 30:26
  SPEAKER_02: Now, how much of you know incremental value there is is going to depend.
• 30:31
  SPEAKER_02: Sometimes it's not very material, but it obviously is going to depend on the number of options, how long the period is that you extend to.
• 30:39
  SPEAKER_02: So you do want to do that calculation to see, you know, and there may be a material amount of incremental value to record.
• 30:46
  SPEAKER_02: And this would be recorded immediately because these options are already vested.
• 30:51
  SPEAKER_01: All right.
• 30:52
  SPEAKER_01: That's very helpful and definitely some complexities to think about there.
• 30:56
  SPEAKER_01: So if again, you are dealing with this type of situation, where would you go for more guidance?
• 31:04
  SPEAKER_02: So we covered modifications of stock-based compensation awards in chapter four of our stock-based compensation guide.
• 31:11
  SPEAKER_01: Excellent.
• 31:12
  SPEAKER_01: So then, Angela, let me ask you another question before we start to wrap things up.
• 31:16
  SPEAKER_01: Because one of the things with any of these types of I'll call it one time, then people start to immediately think about non-gap measurements.
• 31:24
  SPEAKER_01: And so what do we see how people are treating these for non-gap and or how they should be thinking about that if they're considering including them in a non-gap measure?
• 31:35
  SPEAKER_02: Yeah, so I guess often referred to as restructuring charges, right?
• 31:40
  SPEAKER_02: We do often see that as a type of expense that companies might exclude from their non-gap measures of profit.
• 31:48
  SPEAKER_02: And again, that's just going to depend on the company's policy around non-gap measures, and they would want to apply that consistently.
• 31:55
  SPEAKER_02: Um, now, as we've seen on, you know, we've covered on some webcasts, we've also probably covered on some other podcasts, this is really a hot topic for the SEC, an area where they are really focused on non-gap measures.
• 32:09
  SPEAKER_02: And in particular, they're focused on whether costs that are being excluded are normal and recurring.
• 32:17
  SPEAKER_02: Because if you're if you are excluding normal and recurring expenses, the staff believes that that results in a misleading non-gap measure, which is not permitted, right?
• 32:29
  SPEAKER_02: So we did recently see the SEC update their guidance, um, their interpretive guidance in their CNDIs, their compliance and disclosure interpretations, to provide further guidance on what do they really mean by normal and recurring.
• 32:45
  SPEAKER_02: So it is important to go look at that in the in the context of these kinds of charges.
• 32:52
  SPEAKER_02: Um, and I wouldn't say that it's a necessarily a quick answer whether they're going to be normal and recurring, because it's really going to depend on the company's facts and circumstances.
• 33:04
  SPEAKER_02: And in particular, that whole idea of recurring, um, you know, the staff has said that this is an operating expense that occurs repeatedly or occasionally, including at irregular intervals.
• 33:19
  SPEAKER_02: So to be recurring doesn't necessarily mean that it has to be on a regular basis.
• 33:24
  SPEAKER_02: It could be at irregular intervals.
• 33:27
  SPEAKER_02: So if a company has done, you know, these kind of these kind of restructurings multiple times, you may want to really think about whether it would meet that definition of recurring.
• 33:39
  SPEAKER_01: All right, that's very helpful and definitely would encourage our listeners to check out the broader discussion of non-gap that I had with uh Kyle Moffat.
• 33:48
  SPEAKER_01: We released a podcast back in December.
• 33:50
  SPEAKER_01: So we'll include a link to that.
• 33:52
  SPEAKER_01: So then, Angela, coming back to our specific topic today, restructuring more broadly, you know, I think this is one of the topics that is a little intimidating for people, even if you have had these ones that are more frequent than otherwise, because it is a very complex area of accounting.
• 34:10
  SPEAKER_01: There's lots of different factors as we've talked about.
• 34:13
  SPEAKER_01: So when you're helping companies or engagement teams dealing with these types of issues, what are some of the pieces of advice that you would give?
• 34:21
  SPEAKER_02: Yeah, well, I mean, I think the the, you know, the reaction sometimes is if you're doing a restructuring, the company expects that we're just going to have a one-time charge, it's all going to be in the same period, and we're done.
• 34:33
  SPEAKER_02: And as we've talked about, that's not not necessarily going to be the case.
• 34:36
  SPEAKER_02: You could actually have charges in different periods, or you could have charges that go over time.
• 34:43
  SPEAKER_02: So the the you know, the advice is that if you are going to have one of these events, that you definitely want to break down into pieces, you know, the different types of benefits being provided, including different types of severance payments, including whether they are under an existing plan, are they one-time, involuntary, voluntary, and then how are you modifying any stock-based compensation awards?
• 35:08
  SPEAKER_02: Break that down into pieces and figure out which model is going to apply.
• 35:12
  SPEAKER_02: And that will help sort of map out, okay, in what period are all these charges going to be recorded.
• 35:18
  SPEAKER_02: And if you really get in front of this, I know, which can be challenging because often with these events, there's really only a small group of people who might be, you know, in the know early on.
• 35:30
  SPEAKER_02: But to the extent you can, I mean, it's good to get in front of these situations because understanding how the timing might play out could even impact things like, okay, when are you going to do that communication to employees?
• 35:44
  SPEAKER_02: And like you said, some of these things often happen like right at period end.
• 35:48
  SPEAKER_02: So whether you do it the day before period end or the day after period end is actually gonna make a big difference in the accounting.
• 35:55
  SPEAKER_01: Well, and Angela, I was thinking as you were talking there, I, you know, this is also a case where often companies in a press release about this are going to be talking about the amount of charge they expect to take.
• 36:08
  SPEAKER_01: So all the more reason to really understand the pieces that are making up that charge, hopefully, before uh you're going public with some of that information.
• 36:17
  SPEAKER_02: Yeah, that's a really good point.
• 36:18
  SPEAKER_02: You don't want to say one thing and then have to change it later.
• 36:20
  SPEAKER_02: Exactly, exactly.
• 36:21
  SPEAKER_01: Well, Angela, definitely an important topic and very timely.
• 36:25
  SPEAKER_01: So thanks so much for joining me today.
• 36:27
  SPEAKER_02: Yeah, no problem.
• 36:28
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• 36:31
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• 36:50
  SPEAKER_01: From Thought Leadership at PwC, I'm Heather Horn.
• 36:55
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