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Full disclosure: Stock-based compensation · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC.
• 0:06
  SPEAKER_03: Welcome to PWC's Accounting Podcast.
• 0:09
  SPEAKER_03: I'm Heather Horn.
• 0:11
  SPEAKER_03: Thanks for tuning in to the next episode in our full disclosure summer series, the show all about presentation and disclosure from the top of the financial statements down to the last footnote.
• 0:22
  SPEAKER_03: While it may sound like accounting 101, I guarantee you'll learn something new each episode.
• 0:27
  SPEAKER_03: Today's focus stock-based compensation awards.
• 0:31
  SPEAKER_02: Stock comp can have such a wide variety of economic implications to a company.
• 0:38
  SPEAKER_01: Yeah, so obviously there's lots of judgment and assumptions that are involved in StockComp valuation, and therefore making sure we've got good disclosure is important.
• 0:52
  SPEAKER_03: Those are my guests, Jay Celeber and Ken Stoller, both PwC National Office Partners.
• 0:58
  SPEAKER_03: Throughout this discussion, we'll cover presentation requirements, explore required disclosures, and leave you with some best practices.
• 1:05
  SPEAKER_03: And if that wasn't enough, Jay and Ken even came prepared with a stock comp accounting joke.
• 1:11
  SPEAKER_03: And yes, it's as bad as you may predict.
• 1:13
  SPEAKER_03: In any event, stick around for some laughs and let's get started.
• 1:20
  SPEAKER_03: Jay, Ken, thanks so much for joining me today.
• 1:23
  SPEAKER_03: Looking forward to our conversation about stock-based compensation.
• 1:27
  SPEAKER_03: And Jay, I know I'm going to start with you.
• 1:30
  SPEAKER_03: And this is an area where the guidance has been around for some time, but I know we still get quite a bit of questions.
• 1:37
  SPEAKER_03: But just to kick things off, maybe you can start with basic presentation requirements related to stock-based comp.
• 1:43
  SPEAKER_03: So we'll talk about balance sheet in the financial statements, and then we'll get to disclosure later.
• 1:48
  SPEAKER_02: Sure.
• 1:49
  SPEAKER_02: Sure.
• 1:49
  SPEAKER_02: No, that makes sense, Heather.
• 1:50
  SPEAKER_02: And thanks for having me back.
• 1:52
  SPEAKER_02: Uh you sound so formal though when you say stock-based compensation.
• 1:56
  SPEAKER_02: So I think Ken and I will probably just use some shorthand today and refer to it as either stock comp awards or stock comp expense or something like that.
• 2:05
  SPEAKER_03: See, I wanted to see if I could like tongue-trip you to have to keep saying that over and over.
• 2:10
  SPEAKER_03: You know how many times it would take, but I guess it's fine.
• 2:12
  SPEAKER_03: We can use shorthand.
• 2:13
  SPEAKER_02: So to your question, we'll start with the balance sheet.
• 2:17
  SPEAKER_02: And on the balance sheet, stock comp awards are classified as either liabilities or equity.
• 2:23
  SPEAKER_02: And that's based on the accounting evaluation of all the terms of the award.
• 2:27
  SPEAKER_02: And while that's not part of today's podcast, uh, we've talked about that and other ones.
• 2:32
  SPEAKER_02: When an award is classified as a liability, then a company has to figure out whether it's a current or a non-current liability.
• 2:40
  SPEAKER_02: So it's generally classified as current if either a vested award is payable on demand or if vesting is expected to occur within the one-year operating cycle period.
• 2:55
  SPEAKER_02: And then all other liability awards would be classified as non-current.
• 2:59
  SPEAKER_02: Now, what's interesting is when we think about this, it doesn't really matter whether the company expects the awards to be exercised or settled within a year, or even if the award is in the money or not, and the company maybe figures, well, no one's going to exercise an out-of-the-money award, but it might still have some fair value that's on the books.
• 3:19
  SPEAKER_02: And the idea is that if it's in the employee's control and they can choose to exercise it, then the company could be compelled to pay, and that's what makes it current.
• 3:30
  SPEAKER_02: And it also doesn't matter why it gets classified as a liability.
• 3:35
  SPEAKER_02: Uh sometimes that's because it's a cash-settled arrangement.
• 3:37
  SPEAKER_02: That's a little bit easier to think about.
• 3:39
  SPEAKER_02: But other times it might be stock settled, but for one reason or another in the stock comp literature, it's still classified as a liability.
• 3:46
  SPEAKER_02: And the point is if it's a liability, it's a liability, and you have to kind of view it the same way.
• 3:51
  SPEAKER_03: Yeah, and I know this was a point of frustration with many clients when I was uh still in the practice.
• 3:56
  SPEAKER_03: So I think it's definitely a good reminder on both of those, the classification and uh, well, yeah, the current versus non-current and the overall classification.
• 4:05
  SPEAKER_02: Now, equity classification, of course, a little more straightforward because you don't have to worry about current and non-current, but there is also the temporary or mezzanine equity guidance that applies to stock comp awards too, uh, for those awards that have potential redemption features like put rights, for example.
• 4:23
  SPEAKER_02: Uh mezzanine, as we've talked about in some other podcasts, uh, is presented after liabilities before stockholders' equity.
• 4:30
  SPEAKER_02: And the purpose of presenting it separately and show it there is to show that it's not a permanent part of equity, and the company may have to pay out cash at some point to redeem those awards.
• 4:40
  SPEAKER_02: Now, I I know we won't get into all that guidance here because there's a fair amount of it, but I know Heather, you and I covered the accounting for mezzanine classified stock comp awards on a different podcast about stock comp matters and an IPO that listeners could take a listen to.
• 4:54
  SPEAKER_03: Yeah, and I recommend people check that out.
• 4:56
  SPEAKER_03: It's actually on our sort of top hits for the past few months.
• 4:59
  SPEAKER_03: So you can find that in the library.
• 5:01
  SPEAKER_03: So then, Jay, that's a lot already on the balance sheet, but how about on the income statement?
• 5:06
  SPEAKER_03: Because I know we also have some complexities there that companies need to think through.
• 5:10
  SPEAKER_02: We do, we do.
• 5:11
  SPEAKER_02: And uh so generally, I'd say stock comp expense should be included in the same income statement line or lines as cash compensation paid to the employees that are receiving those stock comp awards.
• 5:24
  SPEAKER_02: So, for example, cost of sales or RD or GNA.
• 5:28
  SPEAKER_02: Uh, in other words, there's nothing unique about stock-based compensation in terms of presentation.
• 5:33
  SPEAKER_02: It's just another form of compensation.
• 5:36
  SPEAKER_02: And that definitely is in line with some of the things we've heard and guidance we've seen from the SEC on sort of focusing on it being a functional cost of the company.
• 5:46
  SPEAKER_02: Uh, and the SEC has some guidance that says you should avoid certain things.
• 5:51
  SPEAKER_02: They don't like certain ways of presenting it.
• 5:52
  SPEAKER_02: One of those things would be putting all the stock comp expense on a separate line in the income statement, for example, a line that might be called stock comp expense or non-cash compensation or something like that.
• 6:05
  SPEAKER_02: Uh, they don't like showing two separate line items for each functional expense, one without the stock comp expense, and then one just for the stock comp expense.
• 6:14
  SPEAKER_02: So like G and A excluding stock comp expense and then G and A stock comp expense.
• 6:19
  SPEAKER_02: They don't like that.
• 6:20
  SPEAKER_02: And they also don't like uh if you include a table at the bottom of the income statement that comes down to a total of what the total stock comp expense is.
• 6:28
  SPEAKER_02: You can have a table that breaks out what amounts are included within each of those functional lines, but you just can't come to a total on the face of the income statement.
• 6:37
  SPEAKER_02: The other thing that you can do to highlight it is you could have a parenthetical amount of how much the stock comp expense is for each of the line items on the income statement.
• 6:48
  SPEAKER_02: So you could have, for example, G and A expense, parentheses, including non-cash compensation of X.
• 6:55
  SPEAKER_02: But the point is you can't show a total of stock comp expense on the income statement, and you can't kind of isolate stock comp expense as its own category.
• 7:05
  SPEAKER_02: Again, it's just viewed as a form of compensation.
• 7:08
  SPEAKER_03: So, Jay, a question before we go on to the cash flow statement.
• 7:12
  SPEAKER_03: You mentioned this SEC was focused on this.
• 7:15
  SPEAKER_03: Is this an area where we tend to see comments, or are there comments beyond sort of what you already covered here?
• 7:21
  SPEAKER_02: Well, we were certainly seeing a lot of comments on this as the SEC was first sort of digging into this area.
• 7:27
  SPEAKER_02: And the SEC did did put out some guidance on it that we can include in the show notes, perhaps, that uh talks about sort of these things that they do and don't like.
• 7:40
  SPEAKER_02: So we do still see some questions that come up about how you presented it, especially if they feel like you're starting to stray a little bit from sort of just viewing it like any other comp expense.
• 7:50
  SPEAKER_02: Uh we see a lot of questions come up around pro forma disclosures, uh, because there are definitely companies that do try to pro forma the stock comp expense out, and there's mixed perspectives around that.
• 8:02
  SPEAKER_02: And the SEC has its guidance on what you can and can't do in pro forma and reconciliation requirements and the like.
• 8:08
  SPEAKER_02: So that's usually where we probably still see the most comment letters, is when people start doing things in pro forma uh earnings information regarding stock comp expense.
• 8:17
  SPEAKER_03: All right, so it definitely sounds like an area to pay attention to.
• 8:21
  SPEAKER_03: So then, Ken, let me bring you into the conversation.
• 8:23
  SPEAKER_03: So, first, welcome.
• 8:24
  SPEAKER_03: So exciting to have you on your first podcast.
• 8:26
  SPEAKER_01: Happy to be here.
• 8:27
  SPEAKER_01: Thank you.
• 8:28
  SPEAKER_03: I'm sure you'll be back.
• 8:29
  SPEAKER_03: Uh so then why don't we move on to the cash flow statement?
• 8:32
  SPEAKER_03: And what should listeners be focused on with that statement?
• 8:37
  SPEAKER_01: So lots of elements of stock comp that could impact statement of cash flows.
• 8:42
  SPEAKER_01: So let's start with the basics.
• 8:44
  SPEAKER_01: And I'm sure most listeners know, Heather, from your recent podcast on statement of cash flows, that most companies use the indirect method.
• 8:55
  SPEAKER_01: So we're starting with net income and then adjusting for non-cash items.
• 9:01
  SPEAKER_01: Now, Jay just finished admonishing us not to present a single line for stock comp on the income statement, but I'm here to tell you that on statement of cash flows, totally okay.
• 9:13
  SPEAKER_01: So stock comp is usually non-cash, therefore, stock comp expense is a non-cash addback in operating cash flows.
• 9:24
  SPEAKER_01: So that's kind of the baseline.
• 9:26
  SPEAKER_01: Uh, but in addition, as I mentioned, stock comp could have a variety of other impacts on statement of cash flows.
• 9:33
  SPEAKER_01: So I'll just talk about a couple of those here.
• 9:36
  SPEAKER_01: Sometimes stock awards are repurchased by a company.
• 9:41
  SPEAKER_01: So this typically happens with private companies because there's no liquid market for the shares.
• 9:47
  SPEAKER_01: So that's going to be a financing outflow, right?
• 9:49
  SPEAKER_01: We're just buying shares back typically from the employee.
• 9:53
  SPEAKER_01: But sometimes those companies will pay amounts in excess of fair market value.
• 9:59
  SPEAKER_01: So that can happen for a variety of reasons, but for accounting purposes, it's usually treated as additional compensation to the employee.
• 10:09
  SPEAKER_01: It's additional comp expense in the PL.
• 10:12
  SPEAKER_01: So for statement of cash flow purposes, we break that payment into two components.
• 10:19
  SPEAKER_01: So we've got kind of the share buyback piece, which is the amount up to fair value, which would be a financing outflow.
• 10:28
  SPEAKER_01: Uh but then we've got the additional payment that was made to the employee, which is treated as compensation.
• 10:34
  SPEAKER_01: That would be shown as an operating outflow.
• 10:38
  SPEAKER_01: Okay, so that's shares being purchased.
• 10:41
  SPEAKER_01: Sometimes we have shares being sold.
• 10:43
  SPEAKER_01: So picture a stock option gets exercised by an employee or some other holder of the option.
• 10:50
  SPEAKER_01: So now we've got cash being received by the company.
• 10:54
  SPEAKER_01: So that's basically just a sale of shares, right?
• 10:58
  SPEAKER_01: We've got a financing inflow related to the cash that's being received.
• 11:02
  SPEAKER_01: Uh, and then companies usually get tax deductions related to stock comp arrangements.
• 11:07
  SPEAKER_01: So all of the tax benefits to the company are going to be reported as operating cash flows.
• 11:14
  SPEAKER_02: And maybe I'll add in, Ken, that that includes now the effects of any windfalls or shortfalls, since those now all go through the income statement based on some updates to the guidance a couple of years ago.
• 11:26
  SPEAKER_02: They all have to go through operating cash flows as well, as do any payroll taxes that the company has to pay associated with uh sort of the taxable event from the exercise of the of options.
• 11:38
  SPEAKER_01: Yep, exactly right.
• 11:39
  SPEAKER_01: That was a the simplification by the by the FASB, and that certainly made life simpler for us.
• 11:44
  SPEAKER_01: Maybe I'll I'll just add one more item that's relatively common.
• 11:49
  SPEAKER_01: So this is uh something that we refer to as a net share settlement for tax withholding.
• 11:57
  SPEAKER_01: So picture an employee vests in 100 shares.
• 12:02
  SPEAKER_01: So employee is going to have to pay some tax on those shares, and the company's got a withholding obligation.
• 12:09
  SPEAKER_01: So sometimes net net the company may simply deliver, let's say, 70 shares to the employee, and then we'll pay the government uh on behalf of the employee for whatever tax they owe.
• 12:22
  SPEAKER_01: So for statement of cash flow purposes, we treat it as if the company first had delivered all 100 shares to the employee and then turned around and bought back 30 of those shares.
• 12:35
  SPEAKER_01: And so the cash outflow is shown as a financing outflow.
• 12:39
  SPEAKER_03: Okay, so definitely something to pay attention to.
• 12:42
  SPEAKER_03: Let me rewind though, because I have a question.
• 12:45
  SPEAKER_03: So, Jay, as you can pointed out, was very specific.
• 12:49
  SPEAKER_03: You can't break this out separately on the income statement.
• 12:52
  SPEAKER_03: But then you highlighted the fact that you could have one line on the cash flow statement.
• 12:56
  SPEAKER_03: So I guess maybe it's two questions.
• 12:59
  SPEAKER_03: First of all, why such a big prohibition on the income statement if you could just turn the page and it's on the cash flow statement?
• 13:06
  SPEAKER_03: And then why did companies still try to put it in income statement if it was so easy to include in the cash flow statement, or did I miss something?
• 13:13
  SPEAKER_02: I'll try to take that.
• 13:15
  SPEAKER_02: And it's maybe not always easy to tell.
• 13:17
  SPEAKER_02: I think it's just the thought is that I think the SEC was sensing that companies were trying to present a different amount of expense or kind of isolate the expense and make it somehow seem different on the income statement than other expense.
• 13:31
  SPEAKER_02: And while we can probably have a longer discussion over which statement is more important, the income statement or the statement of cash flows, they're both certainly very important for uh some different reasons.
• 13:41
  SPEAKER_02: But there definitely is a lot of attention paid to income and earnings per share, of course, as highlight numbers.
• 13:47
  SPEAKER_02: And so I think um there's just great a little greater sensitivity to sort of somehow implying that that is a different kind of expense than other kinds of expenses, if I had to try to guess a little bit at what's underneath all that.
• 14:03
  SPEAKER_03: Well, and Jay, it reminds me of our EPS podcast, because then I guess it's almost a slippery slope of then can you say there's a you know adjust your EPS for this amount, which obviously we know we can't.
• 14:15
  SPEAKER_03: So I don't want to imply that to the listeners, but I, you know, I I could sort of see how it's like went the first step along that line.
• 14:22
  SPEAKER_03: So anyway, very interesting and definitely a good workaround uh if people do want to have that line someplace sort of in the front that they could put it in the statements.
• 14:31
  SPEAKER_03: So then Ken, let me go back to you.
• 14:33
  SPEAKER_03: And since we're talking about stock awards, uh, I'm assuming that we should also be talking about the impact on the statement of stockholders' equity.
• 14:42
  SPEAKER_01: Exactly.
• 14:43
  SPEAKER_01: So yeah, this this is stock compensation, so it's typically being settled with the company's equity.
• 14:48
  SPEAKER_01: Uh, and so clearly there's going to be some impact on the statement of equity.
• 14:53
  SPEAKER_01: So interestingly, first we'll typically have a line for stock comp expense recognized.
• 14:59
  SPEAKER_01: So once again, Jay's admonition doesn't apply uh when we're looking at the the equity statement either.
• 15:05
  SPEAKER_01: And that's because if you think about when when stock comp expense is being recognized, there's a corresponding increase to additional paid-in capital that's being recognized as well.
• 15:16
  SPEAKER_01: So that's why we're showing it in the equity roll forward, is to show those increases to APIC.
• 15:21
  SPEAKER_01: Then we may have further increases to APIC when stock options are exercised.
• 15:28
  SPEAKER_01: So the company is receiving cash, and that's shown as additional paid in capital.
• 15:35
  SPEAKER_01: And then also, you know, we've got shares that are actually being issued at the time of exercise, so there's probably going to be some increase uh to the common stock at par account as well.
• 15:46
  SPEAKER_01: And finally, similar to our discussion on the statement of cash flows, when we have one of these net settlements for tax withholdings, we'll see a decrease in APIC.
• 15:58
  SPEAKER_01: And that's because a portion of the award uh was effectively repurchased by the company.
• 16:05
  SPEAKER_03: All right.
• 16:05
  SPEAKER_03: Well, and definitely I think a summary of all of this is lots of detail and lots of making sure you're getting things in the right spot.
• 16:12
  SPEAKER_03: So understanding all the programs, all that's being issued, and making sure you've got the right records to do this uh accounting is going to be very critical because, again, it's not something you're gonna want to be dealing with the last few days of filing your financial statements.
• 16:28
  SPEAKER_01: For sure.
• 16:28
  SPEAKER_03: So, like I said, it's a lot of presentation, but I know there's also a lot of footnotes.
• 16:33
  SPEAKER_03: Uh so, Jay, what are some of the disclosures that we should be thinking about?
• 16:37
  SPEAKER_02: Well, the FASB provided a fair amount of disclosure guidance here because StockCom can have such a wide variety of uh economic implications to a company.
• 16:48
  SPEAKER_02: Certainly, impacts to the income statement, of course, due to the stock comp expense being recognized as we were just talking about.
• 16:55
  SPEAKER_02: It impacts cash flows and all the various ways that Ken was talking through.
• 16:59
  SPEAKER_02: And it impacts dilution and potential future dilutions, and shares are typically uh issued as a result of all these arrangements, and that's certainly very important to investors.
• 17:09
  SPEAKER_02: So the FASB started with four key objectives of the disclosures for StockComp.
• 17:16
  SPEAKER_02: Uh, one being the nature and general terms of the stock comp arrangements that the companies issued.
• 17:22
  SPEAKER_02: Uh the second being the methods that the companies use to estimate fair value, because a lot of judgment in those.
• 17:27
  SPEAKER_02: Third being the income statement effects, and then lastly the cash flow effects.
• 17:32
  SPEAKER_03: So then before we get into more detail, is this just annual disclosures, or do you also need to be making these disclosures in your interim statements?
• 17:41
  SPEAKER_02: Well, the very detailed disclosure requirements that we'll we'll get into here are dealing with the annual financial statements.
• 17:50
  SPEAKER_02: So for interim statements, companies would look to the guidance in ASC270, the interim reporting guidance.
• 17:58
  SPEAKER_02: And that is mainly focused on disclosing significant changes since the last annual reporting period.
• 18:05
  SPEAKER_02: Uh so you don't have to do all these disclosures on an interim basis, but depending on the type of activity you have, you may choose to provide some of the more detailed information quarterly, uh, just to kind of keep up with whatever is new during the quarter that will eventually make its way into the next annual statements as well.
• 18:23
  SPEAKER_03: All right.
• 18:24
  SPEAKER_03: So then if we think about the objectives that you outlined, I know this in particular was a place where, depending on a company's programs, it was hard to know what was the right level, what's too much, what's not enough.
• 18:37
  SPEAKER_03: So, Ken, can you help our listeners kind of think through that decision making?
• 18:42
  SPEAKER_01: So, as Jay mentioned, you know, the disclosure requirements are principles-based, and we've got just these four high-level objectives.
• 18:49
  SPEAKER_01: But then the FASB went on to provide a lot of implementation guidance with the minimum information required to achieve those four objectives.
• 19:00
  SPEAKER_01: So we've got a lengthy list of these minimum uh required disclosures.
• 19:05
  SPEAKER_01: So I'm not going to go through the whole list, but maybe just highlight some of the kind of the bigger picture items.
• 19:12
  SPEAKER_01: So, definitely important to describe the stock comp arrangements that you have in place.
• 19:17
  SPEAKER_01: So, think about uh the key terms of the award programs, what are the vesting conditions, the service requirements, any performance or market conditions, how many shares are authorized under the plan, right?
• 19:33
  SPEAKER_01: Many investors are very interested in that kind of information because stock comp grants potentially are going to dilute their ownership.
• 19:43
  SPEAKER_01: And so to understand how many shares are authorized and therefore might be granted in the future is pretty important information to them.
• 19:49
  SPEAKER_01: Valuation approach used.
• 19:52
  SPEAKER_01: So stock comp, we're typically talking about fair value, but not always.
• 19:57
  SPEAKER_01: So, for example, uh, private companies are permitted to use intrinsic value when measuring liability awards.
• 20:07
  SPEAKER_01: And so describing the valuation approach that's used for all the various arrangements can be important.
• 20:13
  SPEAKER_01: Policies on forfeitures, the FASB allowed a couple of years ago, updated the rules to allow for a policy election on how we treat forfeitures.
• 20:22
  SPEAKER_01: So are we going to estimate forfeitures or do we record them as they actually occur?
• 20:26
  SPEAKER_01: So let's have some disclosure around that.
• 20:28
  SPEAKER_01: Uh, and one uh I'll just mention one that's actually not a required disclosure, but one that we often find to be helpful is companies' policy on expense recognition.
• 20:38
  SPEAKER_01: So are we following a straight line pattern, or are we using what we call a like a graded attribution or a tranche by tranche attribution, which results in a front-loaded expense pattern?
• 20:53
  SPEAKER_03: So let me ask a specific question on again, thinking back to some of the disclosures I used to review and places where people put a lot of detail that maybe wasn't always as material as it, you know, among different companies.
• 21:06
  SPEAKER_03: So, how is something like a roll forward?
• 21:09
  SPEAKER_03: And I think, you know, this is a case where you think about sort of completeness, and often we do see roll forwards in this area.
• 21:17
  SPEAKER_01: Yeah, there are uh definitely roll forwards and lots of these minimum required disclosures that are listed.
• 21:24
  SPEAKER_01: And so let me talk about some of the disclosures that uh that are required under 718 as it relates to roll forward.
• 21:32
  SPEAKER_01: So, first of all, as uh all our listeners probably know, we're talking about a roll forward, so we're starting with a beginning of year balance.
• 21:39
  SPEAKER_01: Let's say we're talking about a stock option program.
• 21:42
  SPEAKER_01: So we're gonna show our beginning of year options outstanding, and then we're gonna show any increases from new grants that were made during the year, gonna show decreases for any exercises or forfeitures or cancellations, and that'll bring us to our end of year balance.
• 22:00
  SPEAKER_01: And so we're going to show the number and the weighted average exercise price for each of those line items.
• 22:07
  SPEAKER_01: Then we're going to show the number of options legally vested and exercisable at the end of the period.
• 22:15
  SPEAKER_01: We're going to show the weighted average grant date fair value of new grants for each year presented, the intrinsic value of options exercised, or any cash payments on liability awards.
• 22:30
  SPEAKER_01: At the end of the latest period, we're going to show the number and weighted average exercise price and weighted average remaining contractual term of our options.
• 22:40
  SPEAKER_01: There's another disclosure specifically required for public companies, which is the end-of-period intrinsic value of options that are vested or expected to vest.
• 22:52
  SPEAKER_01: So basically, this is all information to help better understand the economics and the potential dilutive impacts of all of these stock comp arrangements.
• 23:04
  SPEAKER_01: And that's just the option roll forward.
• 23:06
  SPEAKER_01: So now if we've also got a restricted stock or an RSU program, and it's pretty common that companies might have more than one type of stock comp program, then we have to have separate roll forwards with all of those types of disclosures there as well.
• 23:21
  SPEAKER_01: And maybe one other that I'll just mention is total unrecognized stock compensation expense and the average period over which it's going to be recognized.
• 23:31
  SPEAKER_02: And if that's not enough, Ken, with all that detail, you know, you mentioned kind of options versus restricted stock.
• 23:38
  SPEAKER_02: We often find that these disclosures need to be even further disaggregated if you have different kinds of plans, like maybe separating those with service conditions only from those with a performance condition or equity awards versus liability classified awards or even employee awards versus non-employee or board member awards, because those help the readers understand the different impacts that these different plans might have a little bit better.
• 24:04
  SPEAKER_02: It's hard to kind of mix the apples and oranges together there.
• 24:07
  SPEAKER_02: So sometimes we see several roll forwards in uh in a company's stock uh compensation footnote.
• 24:14
  SPEAKER_01: So some of the reasons that we end up with stock comp uh footnotes being amongst the longest in a in a company's financial statements could could go on for pages because of all these required disclosures.
• 24:25
  SPEAKER_03: Well, it's funny because when I was listening, I was thinking two things.
• 24:28
  SPEAKER_03: One, that uh the disclosure checklist, which I've mentioned on some other podcasts, can be very helpful here.
• 24:35
  SPEAKER_03: Uh but also the reason I made my comment to begin with is I I had a client that had a few plans, but I think they were frozen, really no activity, but they still had all of their tables and just you know lots of zeros, right?
• 24:51
  SPEAKER_03: So beginning any balances are the same, numbers aren't changing, things like that.
• 24:55
  SPEAKER_03: And so part of my question here is clearly if you have a lot of plans and this there's a lot going on, I think this actually can be long, but very helpful, right, for use or the financial statements.
• 25:06
  SPEAKER_03: But in a case where there isn't maybe a lot of activity, or you know, well, let's try that, that there isn't a lot of activity, or maybe the plans are more minimal.
• 25:15
  SPEAKER_03: Do you see that companies can maybe do like a roll forward in a more written format than including all of these tables?
• 25:24
  SPEAKER_03: Like do you have recommendations for a case like that where it's more a little more basic?
• 25:28
  SPEAKER_01: Yeah, I think I think many cup companies struggle with it because, as I mentioned, it the FASB describes this as the minimum required disclosures.
• 25:37
  SPEAKER_01: And so some look at that and say, I guess I have to include every single one of these items, regardless of how material or immaterial it might be.
• 25:45
  SPEAKER_01: I think from our perspective, if we're really talking about uh uh items that would be immaterial, uh, that various levels of summarization or aggregation of the information so that we make sure we're still achieving the objectives and getting across any pertinent information uh while not maybe including every single bit of information because it's not useful and material, I think is is totally appropriate.
• 26:11
  SPEAKER_03: All right, that's very helpful.
• 26:12
  SPEAKER_03: And then let me ask another question uh that actually something Jay and I have been talking about in this area, and that's fair value.
• 26:19
  SPEAKER_03: So fair value is a big part of determining the amount to recognize for an award, but what are some of the other requirements associated with that disclosure?
• 26:28
  SPEAKER_01: Yeah.
• 26:28
  SPEAKER_01: Yeah, so obviously there's lots of judgment and assumptions that are involved in stock comp valuation, and therefore making sure we've got good disclosure is important.
• 26:42
  SPEAKER_01: So if we think about things like uh the expected term assumption, for example, that's one of the assumptions that goes into valuation of stock option, disclosing the method used to develop the expected term, right?
• 26:56
  SPEAKER_01: Are we basing it on our own historical exercise behavior?
• 27:00
  SPEAKER_01: Are we using some simplified method, etc.?
• 27:03
  SPEAKER_01: Expected volatility, how are we coming up with expected volatility?
• 27:07
  SPEAKER_01: Is it based on uh historical share price behavior?
• 27:12
  SPEAKER_01: Is it based on uh implied volatility from our publicly traded options?
• 27:17
  SPEAKER_01: Is it some mix?
• 27:18
  SPEAKER_01: Uh, and then any of the other kind of key assumptions that are used, making sure we've got appropriate amount of disclosure, whether it's dividend rate or risk-free rate, or any other adjustments that we might see, like um some companies will have adjustments for discounts uh related to post-vesting holding restrictions on stock awards.
• 27:43
  SPEAKER_01: So basically providing enough information to help readers understand what were kind of the significant assumptions that were used and how did we develop them.
• 27:52
  SPEAKER_03: All right, so both.
• 27:54
  SPEAKER_03: Thank you so much.
• 27:54
  SPEAKER_03: Obviously, a lot to think about.
• 27:56
  SPEAKER_03: I think we give some good guidance today.
• 27:59
  SPEAKER_03: But if someone wants to go and look for more, uh, where's the best place to go?
• 28:04
  SPEAKER_03: So, Ken, I'll go to you for that.
• 28:06
  SPEAKER_01: Yeah, so um, since we've been talking about presentation and disclosure of stock comp, then I think the best starting point would be chapter 15 in our financial statement presentation guide.
• 28:18
  SPEAKER_01: Uh, but then more generally, uh, if you're looking for information just on kind of accounting for stock compensation, then uh our stock compensation guide would be a great place to go.
• 28:28
  SPEAKER_01: Uh and then, of course, throughout the podcast here, we've touched on uh a bunch of kind of more nuanced topics, which we discuss in much more detail in some of the um stock compensation related podcasts that uh that we've done with you.
• 28:44
  SPEAKER_01: I think there's four of them, so I won't try to rattle them off, but uh we've we've definitely got the good archive on stock comp podcast to go to.
• 28:51
  SPEAKER_03: All right.
• 28:52
  SPEAKER_03: And then Ken, since you're new to our listeners, I think they might be interested to know what you were doing before you joined us in the national office.
• 29:00
  SPEAKER_03: So can you give us just a quick highlight of what you were, what your background?
• 29:05
  SPEAKER_01: Yeah, well, this is actually my my second time in our national office.
• 29:09
  SPEAKER_01: I was here from 2005 to 2009 or so.
• 29:13
  SPEAKER_01: And then for the last 12 years, I've been in a uh more of a consultative role where I've been working uh mostly with our non-audit clients, but still in the area of uh stock compensation and pensions and other employee compensation matters.
• 29:29
  SPEAKER_01: But it would be helping them design their programs or helping them think through what the potential accounting implications might be, or valuation issues, or process issues, and that kind of thing.
• 29:41
  SPEAKER_01: All right.
• 29:41
  SPEAKER_01: Well, thank you.
• 29:42
  SPEAKER_01: I But Heather, I thought I thought you were gonna ask me if I knew any good jokes related to stock compensation.
• 29:47
  SPEAKER_03: That was gonna be my final question, but please go for it.
• 29:51
  SPEAKER_01: Any jokes?
• 29:53
  SPEAKER_01: Well, here here's my stock compensation joke.
• 29:56
  SPEAKER_01: So why did the stock option cross the road?
• 29:59
  SPEAKER_03: Oh no.
• 30:00
  SPEAKER_03: I can't believe I asked you this question.
• 30:02
  SPEAKER_03: Okay, I'll I'll take you up.
• 30:03
  SPEAKER_03: Why?
• 30:04
  SPEAKER_01: For the exercise.
• 30:06
  SPEAKER_03: Oh my gosh.
• 30:07
  SPEAKER_03: We may have just lost all of our listeners.
• 30:11
  SPEAKER_03: Jay, please tell me you don't have to.
• 30:13
  SPEAKER_01: If any of our listeners didn't like that, which I can't imagine that's the case, but if so, I apologize on the point.
• 30:19
  SPEAKER_01: Uh no, I but I will have you know that I made it up.
• 30:21
  SPEAKER_03: It is impressive, and I was going to say it was great you were bringing to us this practical knowledge, but now I'm I'm questioning that a little bit.
• 30:29
  SPEAKER_03: But um so, Jay, I'm not gonna ask you if you have any jokes at all.
• 30:35
  SPEAKER_03: Um I was gonna ask a serious question, but now I'm not gonna now we're not sure.
• 30:41
  SPEAKER_03: All right.
• 30:42
  SPEAKER_03: So then just to wrap things up, I am still, I still need to try to stump you guys.
• 30:46
  SPEAKER_03: So here's my question for you how many statements on stock comp have there been, including EITFs and all those types of things?
• 30:54
  SPEAKER_03: Any guests?
• 30:55
  SPEAKER_02: Dozens.
• 30:56
  SPEAKER_02: Uh if you go back to prior guidance, right?
• 31:00
  SPEAKER_02: Right now we we talk about ASC 718, which grew out of FAS 123R, which superseded FAS 123, which in turn replaced APB25 that was issued in the 1970s or so.
• 31:13
  SPEAKER_02: And APB25 definitely had a lot of both interpretations, accounting interpretations, as well as FASB interpretations or FIN statements, uh, a number of EITF issues.
• 31:27
  SPEAKER_02: There was actually one EITF issue that was dealing with specific subtopics about that old guidance called EITF 0023.
• 31:36
  SPEAKER_02: And that in and of itself had 50 questions and maybe about 75 sub-questions in total in it.
• 31:42
  SPEAKER_02: So there has been a large volume of guidance that has come out over the years, and even just recently, there's been several new ASUs that that have changed some of the guidance for non-employee awards and awards issued to customers and things like that.
• 31:58
  SPEAKER_02: So while maybe it's not quite as many total standards as the revenue recognition literature was before the new guidance came out on that, there were there were many dozens of different standards related to stock compensation as well.
• 32:11
  SPEAKER_01: So, Heather, Jay Jay's response uh sounds to me like a long way of saying, I don't know.
• 32:16
  SPEAKER_03: Yes, although what I was really thinking is for people, you know, we have many younger accountants listening who are only familiar with the codification.
• 32:24
  SPEAKER_03: And I was just thinking the knowledge people had to have to know all those places to go look, that's when we need specialists like you guys.
• 32:32
  SPEAKER_03: But now you're also answering, or you were then too.
• 32:35
  SPEAKER_03: But anyway, answering substantive questions.
• 32:38
  SPEAKER_01: And is why the FASB created the codification is because it was so difficult to know where was the FIN and where was the EITF and where was the APB.
• 32:46
  SPEAKER_01: Yeah.
• 32:46
  SPEAKER_03: The codification, exactly.
• 32:48
  SPEAKER_03: Oh, it's crazy.
• 32:49
  SPEAKER_03: So, all right.
• 32:50
  SPEAKER_03: Well, gentlemen, as always, pleasure to talk to you.
• 32:52
  SPEAKER_03: Thanks for joining me today.
• 32:54
  SPEAKER_01: Thanks, Heather.
• 32:55
  SPEAKER_01: Thanks for having us.
• 32:57
  SPEAKER_03: That does it for today.
• 32:58
  SPEAKER_03: Thanks for tuning in.
• 33:00
  SPEAKER_03: Join me back here every Tuesday and Thursday for new podcast episodes.
• 33:04
  SPEAKER_03: Starting this Thursday, we're kicking off our five-part Facts on Stocks series.
• 33:09
  SPEAKER_03: And you don't want to miss the first episode where we'll set the stage by covering the basics.
• 33:14
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• 33:21
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• 33:25
  SPEAKER_03: From Thought Leadership at PWC, I'm Heather Horn.
• 33:29
  SPEAKER_03: Thanks for tuning in.
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