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Compensation toolkit: Classifying awards as equity or liability · PwC's accounting podcast

• 0:00
  SPEAKER_01: Thought Leadership from PWC.
• 0:07
  SPEAKER_03: Welcome to PWC's Accounting Podcast.
• 0:11
  SPEAKER_03: I'm Heather Horn.
• 0:13
  SPEAKER_03: Thanks for tuning in to another episode in our Toolkit series, where we're taking a deep dive each month into a single topic, recapping the basics, but also focusing in on frequently asked questions and judgmental areas.
• 0:29
  SPEAKER_03: This month is all about StopCom.
• 0:32
  SPEAKER_03: Last week, Jay California Counciller talked about one of the building blocks of the Stopcom model, different types of testing conditions.
• 0:41
  SPEAKER_03: Today Jay's back with Nicole Berman, also from PwC's national office, and they'll be talking about another key element in the model.
• 0:51
  SPEAKER_03: Whether the awards should be classified as equity or liability.
• 0:56
  SPEAKER_03: And as those of you who have worked with these awards know, it can be a lot harder than it may appear.
• 1:03
  SPEAKER_02: I think we've described here how determining whether or not the stock company awards or equity or liability can be pretty complicated, and it can be affected both by the terms of the awards themselves as well as by the actions that the company takes.
• 1:18
  SPEAKER_00: The accounting shouldn't get in the way of what a company's trying to accomplish with plan design.
• 1:24
  SPEAKER_03: There's a lot to cover, so let's get started.
• 1:31
  SPEAKER_03: So, Jay and Nicole, thank you so much for joining me today to talk about another key area in when we're talking about stock compensation guidance.
• 1:40
  SPEAKER_03: And this is related to equity versus liability classification.
• 1:44
  SPEAKER_03: And I know for myself, this is probably one of the more difficult areas and obviously quite important.
• 1:50
  SPEAKER_03: So, Nicole, I thought maybe just to start things off, it'd be helpful to get a baseline of the difference and what really matters when we're thinking about the classification of the awards.
• 2:04
  SPEAKER_00: Sure.
• 2:05
  SPEAKER_00: So the baseline model is about determining whether it's equity or liability.
• 2:10
  SPEAKER_00: It comes down to how the award is ultimately settled.
• 2:13
  SPEAKER_00: Right.
• 2:14
  SPEAKER_00: And so if you think about it, equity awards are settled in shares, like a restricted stock award or a stock option that's physically settled in shares.
• 2:25
  SPEAKER_00: And then a liability classified award is settled in cash.
• 2:29
  SPEAKER_00: And so that's like a stock appreciation rate that pays off based on sort of the difference between the price on the date of the exercise versus that's the price when it was granted.
• 2:41
  SPEAKER_00: But of course, like a lot of things in accounting, it's not quite that simple, right?
• 2:46
  SPEAKER_00: Um so there is a bunch of guidance that expands on that rule.
• 2:51
  SPEAKER_00: And and awards might look like they are share settled, but then actually they may be substantively like a cash settlement.
• 2:59
  SPEAKER_00: And so that that ultimately could be um even possibly like look like an embedded derivative.
• 3:07
  SPEAKER_03: But we'll we'll get to those later.
• 3:09
  SPEAKER_03: I know we don't want to start off talking about derivatives, Nicole.
• 3:11
  SPEAKER_03: We're scared, scare off the audience.
• 3:14
  SPEAKER_00: And so the the reason though that we want to talk about this critical difference is because it not only um impacts the balance sheet presentation, but it also impacts um the income statement as well.
• 3:26
  SPEAKER_00: And so the biggest difference is that equity classified awards are ones that are accounted for at their grant date fair value, whereas liability classified awards are marked to market all the way through the settlement.
• 3:40
  SPEAKER_00: And that impacts the income statement.
• 3:42
  SPEAKER_03: Yes, obviously, then also can get more complicated if you're having to remark them each period.
• 3:49
  SPEAKER_03: Um, so then Nicole, just taking that, then when we are talking to companies, my guess is we're gonna see a preference for the equity model, but any sort of perspective on that?
• 4:00
  SPEAKER_00: That's fair.
• 4:00
  SPEAKER_00: I mean, equity model is usually what companies are looking for because they get that fixed day one expense.
• 4:08
  SPEAKER_00: But um, liability awards, the amount that the employee gets ultimately is how much the expense will be.
• 4:14
  SPEAKER_00: And so sometimes that goes up as time goes on, and and sometimes that goes down, and then the expense is reflected.
• 4:20
  SPEAKER_00: You don't have a floor there for liability classified awards the way you do for equity.
• 4:26
  SPEAKER_03: Jay, if I think back to our discussion on the last podcast, we did talk about some circumstances where maybe you would wind up recognizing expense and potentially it was perhaps greater than what the employee actually realized.
• 4:41
  SPEAKER_03: So I guess in the case of a liability award, you would not have that potential mismatch.
• 4:47
  SPEAKER_02: That's right.
• 4:47
  SPEAKER_02: Yeah, we talked about, for example, like award with market conditions where you might have to recognize the expense for an equity classified ones, whether or not you ever hit the target and the award legally vested, and you can't reverse it just because it didn't vest, as long as people worked long enough.
• 5:04
  SPEAKER_02: But you're right, Heather, that if this was a liability award and it ultimately never vested, it means it was ultimately worth nothing.
• 5:10
  SPEAKER_02: And therefore you would actually, you know, reverse all that expense and write it down to nothing.
• 5:15
  SPEAKER_02: Of course, the risk would be that if the price went up and it was worth a lot more than you started with, you'll end up with a lot more expense.
• 5:20
  SPEAKER_02: And that's hard to predict, of course, uh when you're trying to model things out.
• 5:24
  SPEAKER_03: Yes, and definitely to Nicole's point, I can see that just knowing day one, having an equity classified, I could see how that's preferable.
• 5:32
  SPEAKER_03: So, Jay, we talked sort of a general model from Nicole.
• 5:36
  SPEAKER_03: Can you give some examples when we have exceptions to that rule?
• 5:40
  SPEAKER_03: So maybe cases where even though the award is settled in shares, so I would say, oh, when Nicole was explaining that, it's easy, it's equity, it would actually still wind up as a liability.
• 5:51
  SPEAKER_02: Sure, sure.
• 5:53
  SPEAKER_02: Yeah, and one of one of them is actually something we talked about last week on our podcast as well, where it could be affected by the vesting conditions of the award.
• 6:02
  SPEAKER_02: So we talked last week about how you have service performance and market conditions are the main ones.
• 6:07
  SPEAKER_02: And I hinted at there's a fourth kind that has to be treated as a liability award.
• 6:13
  SPEAKER_02: And that's one where the award or its vesting terms are indexed to something else besides a service, market, or performance condition.
• 6:21
  SPEAKER_02: So, like one example would be if the uh exercise price changes based upon the price of gold moving around, let's say.
• 6:30
  SPEAKER_02: And let's say even the companies involved in operations that use gold.
• 6:35
  SPEAKER_02: So the price of gold matters to them, it affects their operating results.
• 6:39
  SPEAKER_02: So it kind of feels a little bit like a statement operations, but because gold is still sort of an index as a commodity, if you tie the award into the price of gold, that's going to mean it's something other than service performance or market conditions, and you'd end up having to treat it like a liability.
• 6:58
  SPEAKER_02: Uh, you know, another one kind of along those same lines that we might see a little bit too, especially with sort of inflation being as it is right now, uh, when maybe the company wants to incentivize executives to grow revenue.
• 7:12
  SPEAKER_02: So there's a performance condition tied into sales growth.
• 7:16
  SPEAKER_02: But with high inflation, you know, maybe the company doesn't want the executives to earn the award just because inflation caused a bunch of price increases, not real substantive revenue growth or organic revenue growth.
• 7:28
  SPEAKER_02: So the target is defined as hitting a certain amount of revenue growth in excess of inflation, CPI changes or things like that.
• 7:39
  SPEAKER_02: And again, because CPI is this external index, that's also considered to be sort of an other type of condition.
• 7:46
  SPEAKER_02: And that would make the whole award a liability award.
• 7:50
  SPEAKER_02: You know, I know you hinted at, you said you don't we don't want to like scare people away with notions of embedded derivatives.
• 7:54
  SPEAKER_02: And it's not technically an embedded derivative because stock comp awards aren't in the scope of derivative accounting, but it's kind of a similar-ish kind of thing that the FASBI said those are treated like liabilities.
• 8:08
  SPEAKER_03: So then um I'm glad to hear it's not technically an embedded derivative.
• 8:12
  SPEAKER_03: But if that's the case, then what financial instruments guidance would we be looking at?
• 8:16
  SPEAKER_02: The stock comp guidance does say you have to consider the broad financial instruments guidance on determining liability versus equity classification, and that's an ASE 480.
• 8:29
  SPEAKER_02: So that guidance you do have to consider when you're evaluating classification of stock compensation awards.
• 8:36
  SPEAKER_02: And one of the common things that sort of has an interplay between those would be a situation where it's a stock comp award and it's going to be settled in shares, but it's going to be settled in a variable number of shares that's designed to meet or yield a certain dollar amount.
• 8:57
  SPEAKER_02: So that could be, for example, a fixed dollar amount.
• 9:00
  SPEAKER_02: So it's a fixed dollar amount that at some point in the future will be settled in a number of shares based upon a stock price in the future.
• 9:09
  SPEAKER_02: So it's a variable number of shares.
• 9:11
  SPEAKER_02: Or it doesn't have to be a fixed dollar amount, it could be a dollar amount value that changes, but it changes based on things other than movements in the stock price.
• 9:20
  SPEAKER_02: Like different revenue targets yield different bonus amounts.
• 9:25
  SPEAKER_02: You can almost think of it as so different dollar amounts for this revenue target, this revenue target, or this revenue target.
• 9:31
  SPEAKER_02: But then at the end of the day, you're going to take whatever dollar amount you owe the employee divided by the stock price at the settlement date, and that's going to yield a certain number of shares, and you're going to settle it in shares.
• 9:44
  SPEAKER_02: But what the guidance gets at is that because you don't really, as an employee, care if the stock price goes up or the stock price goes down, because you're always going to get the same amount of money either way economically.
• 9:56
  SPEAKER_02: And so you really aren't in the position of a shareholder along the way here.
• 10:00
  SPEAKER_02: And so it's really almost more like stock-settled debt.
• 10:03
  SPEAKER_02: So those are also viewed to be liability awards, even though all you're ever going to deliver is shares in that case.
• 10:11
  SPEAKER_02: And then maybe one last thing, it's changing gears a little bit from these kinds, but we do see it as well.
• 10:19
  SPEAKER_02: And it's a situation that often gets referred to as net tax withholding.
• 10:26
  SPEAKER_02: And what this is getting at is that employees often have to pay withholding taxes at the time of exercising an award, like when a stock option gets exercised or retrick a share award vests as part of their personal income tax situation.
• 10:42
  SPEAKER_02: And what many companies do is they offer arrangements where the company will facilitate that withholding by effectively reducing the number of shares that get delivered to the employee, and then taking the dollar value of those shares and paying the tax authority on behalf of the employee.
• 11:02
  SPEAKER_02: So basically, you know, the employee gets credit for their tax withholding, but doesn't actually have to write a check themselves.
• 11:07
  SPEAKER_02: It just comes out of the shares that they were otherwise going to get.
• 11:10
  SPEAKER_02: And that's viewed as effectively cash settling that portion of the award.
• 11:16
  SPEAKER_02: The employee doesn't get the cash, at least not directly, they kind of indirectly through having it sent to the government for them.
• 11:22
  SPEAKER_02: But the accounting guidance does create an exception that says that you can still treat that award as equity classified as long as the amount the employees can have the company withhold doesn't exceed what's considered to be the statutory maximum tax rate that the government imposes on employees in that particular jurisdiction.
• 11:46
  SPEAKER_02: But the trick is that if you go above that threshold, even a little bit, it's kind of a cliff almost, if you go above that threshold, the guidance says the entire stock comp award has to be treated like a liability because of that effective cash settlement feature.
• 12:00
  SPEAKER_02: Now, that threshold did get increased a couple of years ago by the FASB, so we don't tend to run into this problem quite as much, but it is still something for companies to be on the lookout for because sometimes we find that companies don't explicitly limit what employees can request to have withheld.
• 12:16
  SPEAKER_02: And that could be a problem because now the employees can go above that threshold.
• 12:20
  SPEAKER_02: What we also find is that uh there are some people who get awards that aren't subject to any statutory tax withholding requirements, like board of director members, and maybe some employees in foreign countries are just not subject to any tax withholding requirements.
• 12:36
  SPEAKER_02: And so the guidance says if you're not subject to any tax withholding requirements, if you allow them to do some tax withholdings, you've gone above the threshold and the limit, and it would be treated as a liability award.
• 12:46
  SPEAKER_02: So lots of different ways that you know you could end up getting to liability treatment without uh ever getting real cash uh directly.
• 12:54
  SPEAKER_03: So, Jay, in that last case, the point would be that board member, for example, maybe paying taxes on those awards, but because they're not subject to mandatory withholding, that's why you don't qualify for this exemption.
• 13:09
  SPEAKER_03: Is that correct?
• 13:10
  SPEAKER_03: That's right.
• 13:10
  SPEAKER_02: That's right.
• 13:10
  SPEAKER_02: It kind of ties into does the company have an obligation to withhold from the individuals.
• 13:16
  SPEAKER_02: The individual might very well have a personal income tax requirement, but they just have to submit that on their own to the government in that case.
• 13:24
  SPEAKER_03: And then the other sort of follow-up question I had there, I was thinking about the stock case or the case with the employee um tax withholdings.
• 13:31
  SPEAKER_03: You don't actually know that it's going to be settled that way until they settle the award, right?
• 13:38
  SPEAKER_03: So when the the compensation is awarded, that is, I guess, just in the plan design.
• 13:43
  SPEAKER_03: So this whole um assessment is based on the design of the awards.
• 13:48
  SPEAKER_03: And you may have said that, but I just want to sort of reiterate on that point when you're making this determination, what exactly are you looking at?
• 13:55
  SPEAKER_03: Because you don't really know how they are going to settle it on day one.
• 13:59
  SPEAKER_02: Well, many times, Heather, it is part of the plan documents or the communications with the employee.
• 14:06
  SPEAKER_02: So it might be the case that the employees know that if they want to have that withholding done, they can ask for it at the end.
• 14:15
  SPEAKER_02: So if you make it available to employees to ask for when the award gets exercised, that's when you have to evaluate this because now you're creating this sort of ability to net cash settle some of the award.
• 14:28
  SPEAKER_02: We do also see some where the plan is silent and the company doesn't have a history of doing it, but maybe an employee comes along and says, hey, company, I need to pay these taxes.
• 14:37
  SPEAKER_02: Do you mind doing this for me?
• 14:39
  SPEAKER_02: And so then you'd have to evaluate it at that time.
• 14:42
  SPEAKER_02: But we do actually see, even though you're right, the election is only made at the end when the award gets exercised.
• 14:48
  SPEAKER_02: Oftentimes the terms of the plan, the operation of the plan, the policies that are communicated to employees say that this option is available, part in the pun, this option is available to you when it comes time to uh settle the award.
• 15:03
  SPEAKER_03: All right.
• 15:04
  SPEAKER_03: And then the other question I had is you made a point when you were running through these examples, and I think it's after the second one, which was a little tricky.
• 15:11
  SPEAKER_03: You say we do see these.
• 15:13
  SPEAKER_03: And so my question for you is and clearly this final one about the um employee tax withholdings, I think is relatively common.
• 15:22
  SPEAKER_03: But are those other situations you described sort of ones we see routinely, or are they sort of more unusual cases?
• 15:28
  SPEAKER_03: And I know, you know, you're having a generality here, but I still think it's helpful for the listeners if this is something that may pop up or it's is more unusual.
• 15:39
  SPEAKER_02: Well, I think you're right.
• 15:40
  SPEAKER_02: I think we see the net tax withholding feature a lot, maybe not a lot that go over and above the threshold that trip in the liability treatment, but we see the feature, and you do have to be careful when you're putting the plants together.
• 15:53
  SPEAKER_02: We probably don't see the other ones I described as frequently, the ones about variable number of shares or indexed to something else.
• 16:02
  SPEAKER_02: But they they pop up from time to time along the way.
• 16:06
  SPEAKER_02: And I you know, I think as you know, as we see more inflation, as I said, we might see more indexation in some of the performance conditions that companies are designing to incentivize their employees and the like.
• 16:19
  SPEAKER_02: So not as frequent, I agree with you, but but certainly not um not rare.
• 16:25
  SPEAKER_03: So definitely something to be at least aware of if you're dealing with stock compensation accounting.
• 16:30
  SPEAKER_03: So that's helpful.
• 16:31
  SPEAKER_03: So then, Nicole, let me go back to you because obviously one of the things you mentioned at the very beginning was the fact that if you are paid in cash instead of stock, that's when you would trip and definitely be in this liability guidance.
• 16:45
  SPEAKER_03: However, I know there's also cases that we see where the award is settled in shares, but then maybe the company buys back the shares at some later date.
• 16:56
  SPEAKER_03: And so if you are in those situations and maybe you can give like a better specific example of when we might see this, what happens?
• 17:06
  SPEAKER_03: Are those liabilities or how do you think about those arrangements?
• 17:11
  SPEAKER_00: Sure.
• 17:11
  SPEAKER_00: And and it's it is pretty common.
• 17:14
  SPEAKER_00: So in especially in private companies, we often see um companies wanting to give their employees the ability to get some cash at some point because their shares are not held on the open market.
• 17:29
  SPEAKER_00: And so they often include features like input features where the holder can redeem shares for cash or calls where the company can call those shares back for cash.
• 17:43
  SPEAKER_00: And so you'll see that there is that cash settlement at some point, and that certainly can impact the equity and liability classification.
• 17:52
  SPEAKER_00: Just because they are settling in cash, it's not always then uh a liability.
• 17:57
  SPEAKER_00: And so we'll get into some of those uh exceptions in a little bit.
• 18:01
  SPEAKER_00: Um, because in general, you're trying to figure out what's the substance of the arrangement.
• 18:07
  SPEAKER_00: And it's a question of whether they're settling um the original awards in shares and later sort of settling those shares like the the person is a regular shareholder, just selling shares like a treasury stock transaction, or if they are actually in fact settling the award in cash more like just a cash-settled liability.
• 18:32
  SPEAKER_03: All right.
• 18:32
  SPEAKER_03: So definitely seems like that could be a very fine line between those two different arrangements because you know, let's say I settle in shares and then turn around and in the you know, the next transaction, then I sell back to the company.
• 18:46
  SPEAKER_03: And so how do we think about?
• 18:48
  SPEAKER_03: I guess you mentioned puts and calls, like how do we sort of think about these arrangements?
• 18:53
  SPEAKER_03: Um, sort of the next step.
• 18:55
  SPEAKER_03: Do you get to liability classification or do you respect the sort of structure of the transaction?
• 19:02
  SPEAKER_02: Well, and I'll I'll jump in.
• 19:03
  SPEAKER_02: I I think that's exactly the distinction that this guidance is trying to make and that you as a company have to evaluate because you're trying to figure out is it substantively just cash settlement, or is it substantively that you gave shares and then later you bought back some shares from a shareholder?
• 19:20
  SPEAKER_02: And obviously the closer those two things happen together, you know, your example of the next transaction, well, that probably feels like I just cash settled it, just like did it in two steps, but right after each other.
• 19:29
  SPEAKER_02: Whereas the longer, the longer uh you go, maybe maybe not.
• 19:33
  SPEAKER_02: And and the guidance actually gives us a bit of a bright line here.
• 19:37
  SPEAKER_02: And so what the guidance uh says that you have to uh consider something to be a liability award, sort of effective cash settlement in one of two situations, kind of one for puts from the employee and one for calls from the company.
• 19:52
  SPEAKER_02: So the first one is, and I might use a little bit of the terminology that's in the guidance here, um, is if the employee can avoid bearing the risks and rewards that's normally associated with share ownership uh for a reasonable period of time, then you'd have to consider that to be a liability award, right?
• 20:17
  SPEAKER_02: If they don't have to really uh put themselves in the shoes of a shareholder for a reasonable period of time.
• 20:22
  SPEAKER_02: So what's a reasonable period of time?
• 20:24
  SPEAKER_02: Well, there's one place where the accounting guidance actually gives us a bright line.
• 20:27
  SPEAKER_02: It says it's six months.
• 20:28
  SPEAKER_02: Six months is a reasonable period of time for stock compensation purposes.
• 20:32
  SPEAKER_02: So it's it's pretty bright.
• 20:33
  SPEAKER_02: If it's less than six months, it's one thing.
• 20:34
  SPEAKER_02: And if it's six months in a day, it's a it's another thing.
• 20:37
  SPEAKER_02: There's not a lot of gray around this particular one, like many accounting judgments.
• 20:42
  SPEAKER_02: Um, so if the employee has the ability to put the share at any time within the first six months after earning it, then it would make it a liability award because it's viewed to just be effectively cash settling and not really being subject to the ups and downs of owning the stock.
• 20:59
  SPEAKER_02: That's the put side.
• 21:00
  SPEAKER_02: So then on the call side, looking at it from the other direction, it's you also have to evaluate it.
• 21:06
  SPEAKER_02: Obviously, it's within the company's control, but you have to evaluate is it probable that the company would keep the employee from bearing the risk and rewards for that six-month period?
• 21:16
  SPEAKER_02: So um, you know, with the put, you're not really factoring in probability.
• 21:21
  SPEAKER_02: You're just evaluating do they have the opportunity to cash it out.
• 21:24
  SPEAKER_02: But with a call from the company's perspective, you do have to look at probability, which would therefore consider things like what's the company's intent, what's their expectations, what's their history of doing it, you know, what are people, what are employees reasonably expect to be the case when you're kind of evaluating that judgment there.
• 21:43
  SPEAKER_02: Uh and because it's definitely a common question that we get, uh, I'll add that that six month clock that I've talked about a few times, uh, that only starts after the employee is really at risk for the shares, which means they both have to earn.
• 22:00
  SPEAKER_02: Earn the award and pay cash for the share if paying cash is required, like in a stock option.
• 22:07
  SPEAKER_02: So for a stock award, that just means want to vest because there's no cash to be paid.
• 22:11
  SPEAKER_02: But if it's an option, as I said, they have to both vest in the option and pay the exercise price, either in cash, other assets, or at least a real substantive note.
• 22:23
  SPEAKER_02: Um, just vested in the option doesn't count.
• 22:25
  SPEAKER_02: And exercising the option with a non-recourse note, which we see at times as well, that might come up in a later podcast in the series.
• 22:34
  SPEAKER_02: Uh, that doesn't count as well.
• 22:35
  SPEAKER_02: They really have to be at risk for the stock's value.
• 22:38
  SPEAKER_02: And you know what people generally, the phrase that people generally use for that is saying the stock is mature after it's been held and it rests for six months, it's considered a mature share.
• 22:48
  SPEAKER_02: And now you're more just in the shoes of a shareholder than a former equity comp award holder.
• 22:56
  SPEAKER_03: So then, Jay, let me go back to your point about the six-month clock, because I think what you're saying here is so let's say I met the criteria and my option is awarded to me.
• 23:07
  SPEAKER_03: So whatever service or whatever else it was.
• 23:09
  SPEAKER_03: So I have this option, but I think, hmm, not really sure what's gonna happen with this company.
• 23:14
  SPEAKER_03: So I hold it.
• 23:15
  SPEAKER_03: Now, if it goes up in value, then I might decide along the way, oh, I'm gonna exercise this option and I am sort of participating in the benefit.
• 23:26
  SPEAKER_03: But the point here, I guess, is that if it goes down in value, I'll say, oh, nope, I I'm happy.
• 23:31
  SPEAKER_03: I didn't exercise it and I'm not going to.
• 23:34
  SPEAKER_03: And so then that's why you kind of wait to start the clock until I've actually holding the share itself.
• 23:40
  SPEAKER_03: Is that I know it's a little simplistic, but is that a fair way to think about it?
• 23:44
  SPEAKER_03: Right.
• 23:44
  SPEAKER_02: It's because you've you've put real cash down on the table and now you're really at risk, you know, up until that point.
• 23:50
  SPEAKER_02: Obviously, you benefit from increases, at least on paper, right?
• 23:54
  SPEAKER_02: Because you're holding an option that's in the money, so you've benefited, but you haven't put your money where your mouth is yet.
• 24:01
  SPEAKER_02: So the thought is until you put your money down, you're not really a shareholder.
• 24:05
  SPEAKER_02: And so, you know, again, it's just in drawing these distinctions between am I effectively cash settling the arrangement or not, you have to put your money down.
• 24:14
  SPEAKER_02: So the thought is if I invest in an option today, I hold it for three years, and then I exercise it three years from now, and then a month after that it gets bought back, that's still viewed as effectively cash settling the arrangement.
• 24:28
  SPEAKER_02: Because I never I hadn't put myself at risk by putting my money down to actually buy the share and become a real shareholder.
• 24:35
  SPEAKER_03: So then that's another case.
• 24:37
  SPEAKER_03: I guess that plan design really becomes important because otherwise you don't know if that circumstance is going to exist.
• 24:44
  SPEAKER_03: Like because you said if you have the ability to put it back to the company within six months.
• 24:49
  SPEAKER_03: And so that's how you can decide how you're gonna account for something that may not happen until, like you said, in three years in the future.
• 24:57
  SPEAKER_03: Nicole, let me ask you a question.
• 24:58
  SPEAKER_03: Uh, going back to what you said that I thought was very helpful at the beginning, that we typically see this with private companies, because I was trying to figure out when you would see this.
• 25:06
  SPEAKER_03: Is this something that's pretty limited to private companies, or do we sometimes even see this with public companies?
• 25:13
  SPEAKER_00: It's pretty unusual to have puts or or calls with public companies because uh an employee could really just go and sell their share to the market.
• 25:22
  SPEAKER_00: There's there's sort of no reason.
• 25:24
  SPEAKER_00: Um, so so it is much more unusual for public companies to have those.
• 25:28
  SPEAKER_03: Okay, that makes sense.
• 25:30
  SPEAKER_03: And then, Nicole, let me also ask you a follow-up question.
• 25:33
  SPEAKER_03: Is I know sometimes we see these where maybe there's a difference in the repurchase price.
• 25:39
  SPEAKER_03: So you have this put or the call, but maybe it's other than the fair value at the time of the repurchase.
• 25:45
  SPEAKER_03: And I would think particularly if you're dealing with a private company, it's not like you can look at the newspaper or I guess online these days, um, and say, oh, this is the fair value today, this much more involved.
• 25:55
  SPEAKER_03: So, how do you think about those types of awards or there's some other pricing in there?
• 26:01
  SPEAKER_00: Yeah, that that's a good question.
• 26:02
  SPEAKER_00: I we we wanted to make that point that the repurchase price is important.
• 26:07
  SPEAKER_00: Um, and if it is something that other that's that's not fair value, and and it is pretty common, uh, we see private companies that in order to come up with what it would be, they might need to do a valuation.
• 26:18
  SPEAKER_00: So they might go ahead and just use some type of a derived formula, like a fixed EBITDA multiple.
• 26:26
  SPEAKER_00: And if it's a fixed multiple, that's not really um giving the holder kind of the real variations in like they're not a real shareholder because they're not subject to the variations of stock ownership.
• 26:42
  SPEAKER_00: It's just a fixed multiple, right?
• 26:45
  SPEAKER_00: Which may correspond to the value of the company, but it may not if if it's not, if that multiple is not able to move.
• 26:54
  SPEAKER_00: So um, so those would cause liability classification if it is in fact a fixed type multiple.
• 27:02
  SPEAKER_00: And also in those cases, you know, Jay referred to this six-month sort of free pass where if you held it for six months, you'd be able to be a real holder.
• 27:12
  SPEAKER_00: But here, because you're still only getting the value based on a fixed multiple, you're not a real shareholder anyway.
• 27:20
  SPEAKER_00: And so um, those end up end up being classified as a liability award.
• 27:25
  SPEAKER_03: So it's kind of interesting, Nicole, because your point is that's not really a share award.
• 27:30
  SPEAKER_03: It's just an award that's going to give you some payoff effectively in the future.
• 27:35
  SPEAKER_03: Um, so it's a very interesting way of thinking about it.
• 27:38
  SPEAKER_03: But it seems like this could get very complicated.
• 27:41
  SPEAKER_00: Exactly.
• 27:41
  SPEAKER_00: I do think it definitely gets complicated.
• 27:43
  SPEAKER_00: And I do think that that some private companies really feel like that that multiple is a good measure for the company's value, but yet that maybe on the grant date, that particular fixed multiple of EBITDA makes, you know, would correspond to the value of the company that that could be um consistent with what a share price would be.
• 28:05
  SPEAKER_00: But you know, that that could change in the future when this thing vests.
• 28:09
  SPEAKER_00: And so when you fix that amount, that's when it becomes sort of more like a liability than really um bearing the risks and words of like ownership of an of equity.
• 28:21
  SPEAKER_03: All right.
• 28:21
  SPEAKER_03: Definitely a good point there.
• 28:23
  SPEAKER_03: And definitely sounds like something that you would want to talk to your advisors before you reach the conclusion based on this conversation we're having on this podcast.
• 28:32
  SPEAKER_03: Um, so Nicole, let me ask you another follow-up question because we had this like rule of thumb here that if it's redeemable for cash, then you would have a liability classified award.
• 28:42
  SPEAKER_03: But we've now talked about some situations where it's share um settled, other cases where we're settling in cash, that we wind up with a equity classification.
• 28:53
  SPEAKER_00: It's true, you can have that.
• 28:54
  SPEAKER_00: So it gets gets pretty complicated.
• 28:56
  SPEAKER_00: You can go either way.
• 28:58
  SPEAKER_00: So let me explain when when you can have that situation.
• 29:01
  SPEAKER_00: And it's when you sort of follow that six-month rule where if an award is equity settled and that cash redemption happens more than six months later, that's when you've had that time to kind of be a real shareholder.
• 29:18
  SPEAKER_00: So the the the FASB believes the six months have have passed, and you're you're then have, you know, bared the risks and rewards of ownership for that that period of time.
• 29:30
  SPEAKER_00: And so then it can be equity classified.
• 29:34
  SPEAKER_00: And so we do see um that written into a lot of award agreements where they want to give their holders liquidity and they want to retain equity classification.
• 29:45
  SPEAKER_00: And so if that is kind of the way the plan is designed, then you can retain equity classification as long as you require a six-month holding period after the award is if it's a share is vested, or like Jay explained, if it's an option, it's been exercised.
• 30:04
  SPEAKER_00: I do want to make one more note though, is that awards that have a put feature but then can keep equity classification in this kind of situation.
• 30:13
  SPEAKER_00: If the company is an SEC registrant, they do need to think about temporary equity or mezzanine classification.
• 30:20
  SPEAKER_00: And we see that happen when um private companies go public.
• 30:24
  SPEAKER_00: They have to look out for that as they become SEC registrants.
• 30:27
  SPEAKER_03: All right, that's helpful.
• 30:29
  SPEAKER_03: So then let's go back then to think about puts and calls.
• 30:32
  SPEAKER_03: So you could have a put or call or both.
• 30:36
  SPEAKER_03: Do we think about them and do we account for them the same way, or do we wind up with some differences, say?
• 30:41
  SPEAKER_02: Um well, they're not exactly the same, same concepts, but they're not exactly applied the same way, just given who's can in control of what.
• 30:51
  SPEAKER_02: Uh the thought being that since put features, as I said before, are in the control of the employee to exercise, the probability about whether they will or won't exercise it or their the company's experience with whether people do or don't exercise them really isn't relevant.
• 31:08
  SPEAKER_02: The point is that they have the opportunity to get cash at their option.
• 31:13
  SPEAKER_02: And so that means if the employee can put it back at any time, sort of within that six-month period, it's viewed to be a liability award kind of from the get-go, because they can they can avoid bearing those risks and rewards of ownership, even if the company has history that shows and no one does.
• 31:30
  SPEAKER_02: And we see that a lot.
• 31:31
  SPEAKER_02: You know, the point is that they have their choice, and like a lot of financial instruments, if it's the holder's choice to ask for cash, you usually end up getting liability treatment.
• 31:41
  SPEAKER_02: Um but once the shares have been held for at least six months, assuming it's a fair value put feature, you know, tying into Nicole, your point about fair value versus sort of formula values.
• 31:53
  SPEAKER_02: But if it's a fair value repurchase feature, once they have held it for six months, then uh you can reclassify it from liability to equity at that point, because now they're a real shareholder at that point, and you can kind of stop the mark-to-market accounting at that at that stage.
• 32:11
  SPEAKER_02: And maybe just to reiterate uh what Nicole you said a little bit ago, because we do see this a lot, is that you know, if you could design the award to only allow puts of mature shares that have been held for at least six months, then you can get equity classification from the get-go if it's a fair fair value put after no earlier than six months after getting the share.
• 32:34
  SPEAKER_02: So that's put features.
• 32:36
  SPEAKER_02: Call features, on the other hand, you know, those are in the control of the company to exercise.
• 32:40
  SPEAKER_02: So as we've said, you do have to consider management's intent as well as maybe the history and frequency and other things associated with past exercises of that call to determine if liability classification is needed.
• 32:54
  SPEAKER_02: So there's much more judgment associated with a call feature than there is with a put feature.
• 32:59
  SPEAKER_03: So then, Jay, you talked about the case where maybe you have to wait till they're mature before you can exercise.
• 33:04
  SPEAKER_03: So sort of like a passage of time type of um plan design.
• 33:09
  SPEAKER_03: But what if you have puts or calls that kick in only if something happens in the future?
• 33:15
  SPEAKER_03: How does that fit in as we think about that counting?
• 33:19
  SPEAKER_02: Right, right.
• 33:20
  SPEAKER_02: Yeah, and we do often see awards with puts or calls that are only exercisable upon some contingent event happening, uh, some common ones that we might run into or put features that allow for cash settlement only upon a change of control of the company, for example, or maybe upon getting fired without cause and sort of involuntary termination.
• 33:42
  SPEAKER_02: We we see both of those a fair bit, as well as maybe call features that can only get triggered when an employee leaves the company.
• 33:50
  SPEAKER_02: See that one a lot, too.
• 33:53
  SPEAKER_02: So when we think about these, if we think about say puts that can only be exercised if some event occurs, equity classification is still considered okay as long as the event is one, outside the control of the employee, so they can't make it happen, and two, not currently probable of happening.
• 34:13
  SPEAKER_02: Um, if both of those are true, then the thought is, well, the employee doesn't appear to be getting the chance to cash settle, so you don't have to treat it as a liability award at that time.
• 34:23
  SPEAKER_02: Now, things could change in the future, right?
• 34:25
  SPEAKER_02: If one of those events occur or become probable of occurring, then now you are expected to be able to get cash for it at your choice, and therefore we would have to flip it to liability accounting at that time.
• 34:37
  SPEAKER_02: So that's reputs.
• 34:39
  SPEAKER_02: For calls that are contingent, um, you know, that kind of just gets wrapped up in the overall analysis I had talked about earlier about whether it's probable that the company is going to buy out immature shares or not.
• 34:53
  SPEAKER_02: A contingent trigger to the call is just another factor to think about when you're assessing probability there.
• 34:59
  SPEAKER_02: So, in that example that I gave with a call feature can only be exercised once an employee leaves the company, which, as I said, we do see a lot in private companies, because oftentimes you don't want a former employee to still be holding shares after they leave the company.
• 35:14
  SPEAKER_02: And so here, the analysis that we typically see this go through is kind of interesting.
• 35:19
  SPEAKER_02: You know, of course, at some point, the employee will leave.
• 35:22
  SPEAKER_02: No one's going to work forever.
• 35:24
  SPEAKER_02: And or the company could fire them, and that might trigger them as well.
• 35:28
  SPEAKER_02: So, you know, at some point the company is going to get the chance to exercise the call.
• 35:32
  SPEAKER_02: And it may very well be that they do intend to exercise the call, and history shows that they exercise the call option.
• 35:38
  SPEAKER_02: But what might not be clear is whether or not the employee will leave with immature shares.
• 35:44
  SPEAKER_02: Because if they leave with immature shares, then we're going to buy likely we're going to buy back immature shares.
• 35:47
  SPEAKER_02: But if they don't, if they happen to leave when they don't have immature shares, then we'll buy back their mature shares.
• 35:53
  SPEAKER_02: And that's okay.
• 35:54
  SPEAKER_02: So since you don't know, and it's not really at least probable that you will buy back immature shares, it's generally okay, we find, to treat those as equity arrangements as well.
• 36:06
  SPEAKER_02: But again, if facts and circumstances change and someone leaves with immature shares, and now it's probable you're going to buy back immature shares, then you would have to flip those to liability awards at that, at that time.
• 36:18
  SPEAKER_03: Wow.
• 36:18
  SPEAKER_03: So it's kind of interesting just thinking of all of these different scenarios we've run through.
• 36:23
  SPEAKER_03: And we talk about this a lot on the podcast, but really the details matter and really understanding the awards, how they're designed, how they're set up.
• 36:31
  SPEAKER_03: And I do think back to when I was audit partner, and sometimes I felt like we knew more about the company's stock plans than sometimes even the employees getting the awards because of all these details.
• 36:41
  SPEAKER_03: But it this is a good reminder that, you know, something that seems small, oh, we'll buy them back, you know, when the employee leaves.
• 36:48
  SPEAKER_03: It's not something you can just pass over, but you really need to think about um when you're doing your accounting.
• 36:54
  SPEAKER_03: So so very interesting um points there, Jay.
• 36:57
  SPEAKER_03: Now, Nicole, let me go back to you because we've been talking about these repurchase features.
• 37:02
  SPEAKER_03: I I would call personally, at least a little more standard.
• 37:04
  SPEAKER_03: Like it's not surprising to see some of these things.
• 37:07
  SPEAKER_03: But I know we also see cases, like another scenario would be that the parties just agree to buy out some of the awards, and maybe there's different reasons they may want to do that.
• 37:18
  SPEAKER_03: Do you treat those the same way, or how do you think about those?
• 37:22
  SPEAKER_00: So, no, not necessarily.
• 37:25
  SPEAKER_00: Um, and and the accounting guidance is interesting because there is a whole other model for repurchases of equity awards or stock.
• 37:36
  SPEAKER_00: And a company can, like you said, just buy out awards.
• 37:40
  SPEAKER_00: They can even buy out kind of unvested or unexercised options.
• 37:45
  SPEAKER_00: Um, and that may not trigger liability or mark-to-market type accounting.
• 37:51
  SPEAKER_00: Of course, the trick is to figure out which model you're in, uh, and it can be a little complicated.
• 37:57
  SPEAKER_00: So let me try and explain that on one end of the spectrum is these types of one-off repurchases.
• 38:04
  SPEAKER_00: Like it would be infrequent, it would be negotiated after the award is granted, and it's there's not going to be anything in the award agreement, no pre-existing repurchase right by either party.
• 38:17
  SPEAKER_00: And those types of repurchases might just be accounted for like repurchases of equity.
• 38:23
  SPEAKER_00: In those cases, um, there may be some expense to recognize at that time because possibly the purchase price is higher than the fair value, or the award you know hasn't been fully vested yet.
• 38:36
  SPEAKER_00: So you need to sort of catch up and recognize any expense you haven't yet recognized.
• 38:41
  SPEAKER_00: And so there's there is some specific provisions to deal with upon those repurchases, but uh that we won't go into all the details, but but those could be just repurchases of equity where you know you're not causing liability classification.
• 38:57
  SPEAKER_00: On the other hand, you might have a situation where there was uh, let's say a call feature in the original terms, um, and then something happens and the company then sort of changes what they what they intended to do.
• 39:11
  SPEAKER_00: Maybe they intended to do one thing and now there's a change, they they decide to repurchase some some shares, you know, they decide to exercise their call right and and repurchase immature shares at that time.
• 39:24
  SPEAKER_00: And that means that at that point they the assessment changed.
• 39:27
  SPEAKER_00: It's now probable that they're going to exercise their call, and there needs to be a reassessment of the classification, and that would cause a modification from equity to liability.
• 39:39
  SPEAKER_00: And the reason that's a big deal is because with liability classified awards, you have to catch up the expense.
• 39:46
  SPEAKER_00: So you're going to take the difference from the grant date fair value to whatever the value is today, if it's higher, and catch up any expense in the income statement.
• 39:55
  SPEAKER_00: Another thing to think about is if they start sort of doing that a lot, that could call into question what their assertion was to begin with, what they intended to do with certain calls.
• 40:07
  SPEAKER_00: And then on the other hand, though, sometimes these awards, what I was just going through was an immature share.
• 40:13
  SPEAKER_00: But if in fact it was mature already, it had been held more than six months, then you may not need to reassess classification.
• 40:21
  SPEAKER_00: It would still be equity classified.
• 40:25
  SPEAKER_02: Yeah, and maybe uh Heather and Nicole in the middle of those ends of the spectrum could be situations where the original award didn't have any repurchase features.
• 40:35
  SPEAKER_02: So it's closer to the first one that Nug mentioned, Nicole.
• 40:38
  SPEAKER_02: But the company develops a history of doing these cash buyouts.
• 40:43
  SPEAKER_02: And that might suggest that the substantive terms of all the outstanding awards that you have effectively include a cash settlement feature because employees might reasonably anticipate that if they just wait long enough, they can get cashed out too.
• 40:59
  SPEAKER_02: So that could actually result in, as you said, Nicole Khan, the liability classification for all the awards, not just the ones that you bought out.
• 41:05
  SPEAKER_02: And again, we do see this at times where companies might establish a window, a purchase window each year, where they will buy out, agree to buy out some awards or shares from people who hold them.
• 41:20
  SPEAKER_02: And maybe they don't necessarily require those to be mature shares to sell them.
• 41:25
  SPEAKER_02: And that could there, you know, some history of doing that might suggest that all the awards are liability awards because of this pattern of cash payments the company has created.
• 41:34
  SPEAKER_00: I I can also add one more thing here that these repurchases, um, if they're done by someone other than the company, sometimes uh an investor or or what's called an economic interest holder or a related party will actually do the the repurchase.
• 41:51
  SPEAKER_00: And you have to think about that as if, you know, it's sort of on behalf of the company.
• 41:57
  SPEAKER_03: All right.
• 41:57
  SPEAKER_03: Those are very helpful.
• 41:58
  SPEAKER_03: So I have a follow-up question because I think, you know, as we've been talking through this, for the most part, I at least have been thinking this was sort of mostly an assessment that you would do the day, you know, the awards, let's say, were granted.
• 42:12
  SPEAKER_03: Um, but what you guys are talking about now is the fact that you may have awards that you've classified and then something changes, and so you change the classification.
• 42:22
  SPEAKER_03: And so is it fair to say that you have to sort of check your, I'll call it assumptions each period for awards, or how do you think about these types of modifications?
• 42:33
  SPEAKER_03: And is it just trigger-based or or what?
• 42:36
  SPEAKER_03: So Nicole and and Jay are nodding.
• 42:38
  SPEAKER_03: Can one of you uh chime in and help me out of this one?
• 42:42
  SPEAKER_00: Sure.
• 42:43
  SPEAKER_00: Yeah, you would keep looking at that assessment each period to determine what what's your intent here.
• 42:49
  SPEAKER_00: And if that changes, then then it may change the accounting.
• 42:52
  SPEAKER_03: All right.
• 42:53
  SPEAKER_03: I think that's a great reminder.
• 42:54
  SPEAKER_03: I'm glad that came up and we could kind of remind listeners and cement that idea that this is not, I guess we call it a set it and forget it model, but one you have to look at each period.
• 43:05
  SPEAKER_02: And tune in next week because we'll talk in our modifications podcast about some of those changes as well, because actually changing that assessment from equity to liability or liability to equity is actually considered a modification.
• 43:16
  SPEAKER_02: So we'll we'll we'll be back next week to talk more about those.
• 43:20
  SPEAKER_03: Perfect.
• 43:20
  SPEAKER_03: I was getting, I think it's a preview of next week.
• 43:23
  SPEAKER_03: I'm getting ahead of myself.
• 43:24
  SPEAKER_03: So all right.
• 43:25
  SPEAKER_03: Well, Nicole, Jay, definitely a lot for people to think about.
• 43:28
  SPEAKER_03: I think this is super helpful.
• 43:30
  SPEAKER_03: I know you both spent a lot of time answering questions in this area.
• 43:34
  SPEAKER_03: Um, any thoughts that you would have for our listeners in terms of as you're dealing with this, some of the things you kind of focus on?
• 43:41
  SPEAKER_03: And Jay, I'll start with you.
• 43:43
  SPEAKER_02: Sure, sure.
• 43:44
  SPEAKER_02: And maybe building on something you you said earlier in the podcast, Heather, I think we've described here how determining whether or not the stock comp awards are equity or liability could be pretty complicated.
• 43:56
  SPEAKER_02: And it could be affected both by the terms of the awards.
• 44:00
  SPEAKER_02: themselves as well as by the actions that the company takes.
• 44:03
  SPEAKER_02: So I guess I'd offer that if you're in an accounting or finance function, it's really helpful to make sure you're being made aware of and being asked to advise on structures and transactions before they happen and not just being handed things and being asked to account for them afterwards.
• 44:21
  SPEAKER_02: Because in this area, once you do something that makes an arrangement of liability award, you can't easily change it after the fact to get it back to equity.
• 44:31
  SPEAKER_03: All right.
• 44:31
  SPEAKER_03: That's a good reminder.
• 44:32
  SPEAKER_03: And I like your reference to looking at the terms and the actions.
• 44:35
  SPEAKER_03: I think that's a great way to kind of summarize what I was trying to get my hands around earlier.
• 44:40
  SPEAKER_03: So thank you for that.
• 44:41
  SPEAKER_03: How about Nicole from your perspective?
• 44:44
  SPEAKER_00: So I guess my final thought is that the accounting shouldn't get in the way of what a company's trying to accomplish with plan design.
• 44:52
  SPEAKER_00: So if they really don't want to dilute their shareholdings, they may want to incentivize their employees with a cash award.
• 44:59
  SPEAKER_00: And you know that that may ultimately result in liability classification, but that would kind of be what their intent is.
• 45:08
  SPEAKER_00: Or on the other hand, like if liquidity was important to them, or they felt like their employees would be incentivized by being able to get liquidity, but they didn't want to have stock volatility in their expense recognition, they could design a plan with you know um redemptions only available after the award is mature.
• 45:28
  SPEAKER_00: So there are options in plan design to think about.
• 45:32
  SPEAKER_03: Well, and Nicole, it's funny you bring that up because as we were talking, and I think I mentioned this, Jay, when we had were on with Ken.
• 45:40
  SPEAKER_03: I do think one of the things that's most interesting about accounting in this area is there is such an element of almost like human behavior and incentivizing behavior.
• 45:48
  SPEAKER_03: And definitely, I think beyond, you know, obviously all contracts are trying to incentivize different things between the parties, but this feels like very personal, I guess, because we are talking about uh compensation.
• 45:59
  SPEAKER_03: So definitely an interesting aspect to this.
• 46:02
  SPEAKER_03: Uh, Jay, maybe final question for you before we get to the fun part of the podcast.
• 46:07
  SPEAKER_03: Um, where should people go if they need more information?
• 46:10
  SPEAKER_02: Well, everything that we've talked about today is covered in more detail in our stock-based compensation guide, uh, especially chapter three about liability classified awards.
• 46:22
  SPEAKER_02: And I guess similar to last week, we do have a number of other podcasts about stock compensation topics that we've done in the past.
• 46:29
  SPEAKER_02: And listeners can certainly check those out in the library.
• 46:33
  SPEAKER_03: All right.
• 46:33
  SPEAKER_03: Thank you for that.
• 46:34
  SPEAKER_03: And um thank you both for joining.
• 46:36
  SPEAKER_03: But before I let you go, we do we are up to our stump the guests section.
• 46:41
  SPEAKER_03: And I will say, Nicole, uh, Ken and Jay were two for two.
• 46:45
  SPEAKER_03: So hopefully you can help Jay continue that streak.
• 46:48
  SPEAKER_03: And on that note, today's question actually builds a little on the question we asked last week, which was talking about what year FAS 123R became effective for all companies.
• 47:00
  SPEAKER_03: And for people who haven't listened to that one, and especially if you're young, you may not realize that was sort of the original guidance uh for stock compensation that became codified that we see in the codification now with changes, et cetera, but nonetheless it was an important standard for stock comp.
• 47:16
  SPEAKER_03: So that occurred in 2006, just as a reminder.
• 47:20
  SPEAKER_03: Um, what well-known stock comp scandal was the SEC investigating in 2006?
• 47:29
  SPEAKER_03: Any guesses?
• 47:31
  SPEAKER_00: All right, I'll chime, I'll chime in that I I think that was there was this whole issue around backdating back then that I think they were trying to get at.
• 47:40
  SPEAKER_03: All right, you are now three for three, and Jay's nodding, so I'll give you both credit.
• 47:45
  SPEAKER_03: Um and Jay, do you want to give more detail or I can share the facts I have from the producers?
• 47:49
  SPEAKER_02: Sure.
• 47:49
  SPEAKER_02: Well, I'll I'll give it a go.
• 47:51
  SPEAKER_02: I mean, that that notion of backdating was that there were allegations that companies were sort of picking and choosing what dates to uh say their awards were granted, so they could choose, for example, the lowest strike the stock price at its lowest point in a period of time, and the company would, after the fact, say they granted awards at that date, in other words, backdate it to an earlier date to uh kind of get the benefit of the lowest stock price to set the exercise price so that employees could uh could sort of benefit the most from future increases.
• 48:27
  SPEAKER_02: And you know, obviously to put in place a whole motion of needing to uh make sure there's good controls over when do you grant awards and making sure the board signs off contemporaneously and all of the approvals are received, or if they're done written sign off as opposed in lieu of being a person in meetings, and those are all accumulated before you say you have a grant date.
• 48:51
  SPEAKER_02: So it was um a bit of gamesmanship the companies were doing to do that.
• 48:56
  SPEAKER_02: They were also doing at the what was viewed at the time to be spring loading, which we've been hearing about again lately with the issuance of SAB 120 a year or two ago as well, uh, of sort of granting awards right before announcing positive news that was going to cause the stock price to go up.
• 49:12
  SPEAKER_02: So there was lots of, we'll call it shenanigans that some some companies were doing with their stock comp awards that yes, became kind of the the um uh the ground swell that allowed the FASB to politically push through, sort of requiring fair value recognition after lots and lots of controversy around that standard.
• 49:32
  SPEAKER_03: All right.
• 49:32
  SPEAKER_03: So very good explanation.
• 49:34
  SPEAKER_03: Thank you both for that.
• 49:35
  SPEAKER_03: So then this one I do think is a little harder, but sounds like Jay, you may know the answer to this.
• 49:41
  SPEAKER_03: So any guesses, like general range, perhaps, or maybe you can say minimum number of the number of cases slash number of companies the SEC was investigating.
• 49:54
  SPEAKER_03: And the order of magnitude is is fine.
• 49:56
  SPEAKER_03: I'll still give you a thumbs up if you're in the range.
• 50:01
  SPEAKER_02: That one's tough.
• 50:03
  SPEAKER_02: I mean, it was a a well-known high profile scenario that was going on, especially in certain parts of the country.
• 50:11
  SPEAKER_02: But in terms of the actual number of companies that the SEC was actually investigating, I bet it was smaller than kind of the public perception of it.
• 50:19
  SPEAKER_02: I bet.
• 50:20
  SPEAKER_02: I'll say 25.
• 50:23
  SPEAKER_00: Nicole, any thoughts?
• 50:25
  SPEAKER_00: I'll I'll guess a little higher.
• 50:27
  SPEAKER_00: I think it was I think it was a a big issue, but you know, uh you're right, it might not have been that much higher.
• 50:33
  SPEAKER_00: So I was gonna go more like like 40 to 50, but that may be too high.
• 50:39
  SPEAKER_03: No, no, actually, I was gonna say keep going, keep going.
• 50:42
  SPEAKER_03: I wanted to motion to them, guys, so they could get four for four, but I just didn't think that was fair.
• 50:47
  SPEAKER_03: Um, the the Chairman Cox in September reported that the enforcement division was in the process of investigating over 100 companies for possible fraudulent financial reporting and stock option grants, and included companies throughout the country and Fortune 500 companies as well as small cap.
• 51:07
  SPEAKER_03: So definitely a big issue.
• 51:09
  SPEAKER_03: So I feel like I should give you partial credit though, because you did get that was a huge issue, just you know, maybe we're a little optimistic on the number of companies.
• 51:17
  SPEAKER_03: So very interesting and sometimes nice to revisit some of the history here.
• 51:21
  SPEAKER_03: So um, thank you both for joining me.
• 51:24
  SPEAKER_03: Very helpful, and I definitely appreciate your insights.
• 51:27
  SPEAKER_02: Sure.
• 51:28
  SPEAKER_02: You're welcome.
• 51:29
  SPEAKER_03: Yeah, thank you too.
• 51:30
  SPEAKER_03: That's our show for today.
• 51:32
  SPEAKER_03: Tomorrow we'll be back with another special sector focused Wednesday episode for you.
• 51:38
  SPEAKER_03: And this Thursday, look for a special audio version of our recent publication, What's CSRD?
• 51:47
  SPEAKER_03: You should already know.
• 51:49
  SPEAKER_03: We're still planning our August Thursday hiatus.
• 51:52
  SPEAKER_03: However, we wanted to squeeze in one more episode before we got started.
• 51:57
  SPEAKER_03: And of course, join me back here next Tuesday as we continue our Stop Comp series with a discussion of stock compensation modifications.
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• 52:14
  SPEAKER_03: From Thought Leadership at PWC, I'm Heather Horn.
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