Accounting is one of the most crucial areas in the equity compensation field. This book is not a general guide to the subject (for that, see our book Accounting for Equity Compensation by Barbara Baksa) but rather is an advanced study of some of the most important topics that arise. Author Takis Makridis, a leading expert in the field, selects a handful of issues spanning valuation and financial reporting.
In the 10th edition (2021), chapter 4, on accounting for performance-based awards, has been completely rewritten.
Table of Contents
Chapter 1: Valuation Models
Chapter 2: Expected Term
Chapter 3: Volatility Estimation
Chapter 4: Expense Recognition for Market, Performance, and Service Conditions
Chapter 5: Making Sense of Forfeiture Rates
Chapter 6: Modification Accounting
Chapter 7: IFRS 2: Today and Tomorrow
Chapter 8: Design Features Driving the Fair Value of a Relative TSR Award
Chapter 9: Accounting for Assumed Awards Under ASC 805
Chapter 10: FASB's Revisions to ASC 718 Under ASU 2016-09
About the Authors
About the NCEO
From Chapter 4, "Expense Recognition for Market, Performance, and Service Conditions "
Take some of the surprises of 2020 and COVID-19 as an example: many companies made grants during their spring granting period but communicated they were intentionally deferring when they would lock down the performance targets on those grants. A grant may have been issued on April 15, 2020, but the performance targets were not locked down until November 2020. For this reason, the grant date is in November, but is it possible that the service inception date is in April? Usually not.
The third requirement listed above in ASC 718-10-55-108 is what usually gets in the way of the service inception date preceding the grant date. In this COVID-19 example, further service will be required after the grant date, and the performance metric will not be satisfied between May and November. Therefore, the service inception date is mechanically anchored to the grant date in November.
However, point three may be satisfied when a performance or market condition does intentionally focus on performance between the service inception date and grant date. One occasional use case we see is with awards granted to business unit executives, in which the company desires to retain some ambiguity in the performance goals (thus a deferred grant date) and a short one-year performance period. For example, an award may be issued in January 2020 with fuzzy goals for fiscal year 2020 that will be clarified and measured at the end of the year, after which there will be a one-year service tail that runs through December 2021. In this example, the service inception date can precede the grant date because failure to achieve the performance metrics during 2020 will result in forfeiture.
There are two cautionary comments to make. First, many software tools define award details using terms that do not match the language used in ASC 718. For example, terms such as “vest base date” are often used even though they are never defined in ASC 718. Second, study the language in the award agreement because this will govern the ultimate accounting treatment (as opposed to a higher-level PowerPoint presentation shared with the board).