NCEO s CEP Exam Preparation Course Spring 2018 Level 1 Core Topic: Accounting

Transcription

1 NCEO s CEP Exam Preparation Course Spring 2018 Level 1 Core Topic: Accounting Presented by Tim McCleskey, CEP Stock & Option Solutions Moderated by Achaessa James, CEP, NCEO

2 Tim McCleskey, CEP Tim McCleskey is an Equity Compensation Consultant for Stock and Option Solutions, Inc. (SOS). He has been a part of the People Solutions division for over eight years, providing clients help with various needs from data projects and implementations to day to day administrative assistance. Tim's experience in equity compensation over the last 12 years includes working as an outsourcing provider, controlling data changes during several restatements, building and documenting processes, and assistance with vendor transitions. He has been a Certified Equity Professional since 2007, volunteers for the Certified Equity Professional Institute, and has spoken at the NASPP conference. Tim McCleskey, a senior Equity Plan consultant for Stock & Option Solutions, is the presenter for the Level 1 Accounting webinar. Tim specializes in equity accounting and acquisitions and provides both project based and on site support for clients throughout the U.S. Thank you, Tim, and welcome

3 IMPORTANT REMINDER 3 Watch the Exam Tips recorded webinar if you have any questions about how to study using the CEPI binder materials The Reading List IS NOT a complete listing of the topics you need to study (it only goes down two outline levels) Refer frequently to the Exam Topics Outline (the Syllabus ) to see all topics (there are often three to four outline levels) Download the new L Suggested Best Reading Resource By Topic document So with our topic focused format this year, we ll cover all the general course review statistics in the Exam Tips webinar which was recorded last week. The only reminder I want to give here is that on the reading list appears to be straightforward, turns out to be more complex when you look at the Exam Topics Outline. Always remember, the Reading List only goes down two outline levels, but there are often 3 or 4 levels on the Exam Topics Outline. Also, new for 2018, I ve prepared a Suggested Best Reading Resource by Topic document for each of the three study levels. You ll find that in the Supplemental Documents section for your study level. NEXT PAGE

4 Level 1 Accounting Topics 4 ASC ESPP Forfeiture Rate Grants to Employees International Measurement of Compensation Cost Recognition of Compensation Cost Role of FASB Valuation Factors Valuation Models The Level 1 exam tests general knowledge of the basic rules and regulations for each core topic, so you won t need to acquire a deep knowledge of each of these areas but you will be responsible for knowing all of the assigned reading in depth. So, jumping right in to the Level 1 Accounting topic, you ll remember from the Exam Tips webinar that 12% of the Level 1 questions are on this topic. Here is the basic checklist we ll use in this webinar to ensure that we ve covered all of the assigned topics. If you studied for Level 1 last year you ll be glad to hear there were no changes to the Level 1 Accounting syllabus for We will cover these assignments not in alphabetic order but, instead, by related topics. We will start with the roles of the domestic and foreign accounting governance bodies. And now I ll turn the presentation over to our Level 1 accounting subject matter expert, Tim McCleskey of Stock & Option Solutions. Thanks, Tim

5 5 Roles of FASB and IASB Reference: The Stock Options Book section 1.2.3, ch.10 intro 057 International > Role of IASB 881 Role of FASB In the United States we use what are called GAAP, the acronym for generally accepted accounting principles. The American Institute of Certified Public Accountants is responsible for defining and enacting these accounting standards. The current regulatory body within the AICPA is the Financial Accounting Standards Board, also known as FASB. As with anything, once a statement is made or a rule is set, someone will be confused as to its application and will ask for clarification. Throughout the years, the various regulatory bodies established by the AICPA have issued thousands of clarifications under various acronyms depending upon which body was in charge at the time. For example the Accounting Principles Board was the governing body established in 1951 so we have rules like APB 25, then in 1973 FASB replaced the APB and we have rules like FAS 123(R), plus all of the SEC commentaries and clarifications on those standards like SAB 107 (for Staff Accounting Bulletin) and, of course, all of these statutes and pronouncements were not easily available in one place. So in 2009, FASB created the Accounting Standards Codification that integrated most everything into one digital reference resource. It reorganized thousands of U.S. GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. It also includes relevant guidance on those topics from the U.S. Securities and

6 Exchange Commission (SEC). On the international front, they have had an equally arduous path to organization that you won t be tested on. Suffice it to say that the current regulatory body is called the International Accounting Standards Board (IASB) and the international equivalent of the ASC is embodied in the International Financial Reporting Standards, or IFRS. The two accounting standards are similar, but not identical, but this is all you need to know for Level 1. Why is all of this important? For those of you who come to equity compensation through law, HR, or any practice other than accounting, the purpose of accounting standards, in general, is intended to smooth out the bumps in a company s recognition of expenses. There are rules and systems related to all kinds of expenses that a company can incur, like real estate expenses, equipment expenses, contract expenses and compensation expenses, for example. The Level 1 accounting syllabus introduces the practices and regulations that guide the expensing of equity compensation awards.

7 Level 1 Roles of FASB and IASB 6 What is the IASB? a. An international accounting standards setting body that promotes global convergence in accounting standards. b. An international regulatory agency that enforces accounting standards. c. The private sector body charged with setting U.S. accounting standards. d. The division of the Securities and Exchange Commission that sets and enforces U.S. accounting standards. Let s start with a question on this first bit of information we ve covered. MODERATOR READS QUESTIONS AND INSTRUCTS ON ANSWERING IN CHAT BOX.

8 7 Reference: The Stock Options Book section, ch.10 intro Level 1 Roles of FASB and IASB Correct answer: a An international accounting standards setting body that promotes global convergence in accounting standards. Explanation: The International Accounting Standards Board promotes convergence in accounting standards among its member countries. However, each country must adopt and enforce its own accounting standards. 057 International > Role of IASB 881 Role of FASB The correct answer is a An international accounting standards setting body that promotes global convergence in accounting standards. At about the same time that the Financial Accounting Standards Board, which sets US accounting standards, released FAS 123(R), the International Accounting Standards Board, or IASB, released a similar, but not identical, proposed global accounting standard. The IASB does not have the power to set accounting standards in its member countries, rather the individual member countries can adopt its standards if they choose to. The SEC has been working on shifting the U.S. from US GAAP (Principles) to international accounting standards for several years now, but the going has been slow and the end is not in sight. Until such time, the only U.S. companies that must comply with IFRS are multinational companies that have financial reporting obligations in international jurisdictions that have adopted IFRS.

9 Level 1 Accounting Topics 8 ASC ESPP Forfeiture Rate Grants to Employees International Measurement of Compensation Costs Recognition of Compensation Cost Role of FASB Valuation Factors Valuation Models Now let s dive into distinguishing between employees and non employees as well as specific accounting rules for each group.

10 Definition of Employee 9 Reference: The Stock Options Book section 10.3 For accounting purposes: Employee Receives a W 2 Includes non employee directors Non employee Receives a 1099 For taxation purposes: Employee Receives a W 2 Does NOT include non employee directors Non employee Receives a Grants to Employees > Definition of Employee The emphasis here is on who is considered an employee for accounting purposes. There are complicated references in your textbooks for the definition of employee and you will find out in the taxation webinar tomorrow that the definition for employee for accounting purposes and the definition for taxation purposes are different. The most common deciding factor is whether the person receives a Form W 2 or a Form 1099 at the end of the year to report their income to the IRS. Beyond that basic determining factor, and as you can see on this slide, when you re answering accounting questions, nonemployee directors are considered employees and when you re answering taxation questions, they are not. Also, if an employee leaves the company, the former employer can continue to expense the options under ASC718 as long as the options are not modified. And we saw in yesterday s taxation webinar that there are some additional parameters for when W 2 employees can be excluded from receiving certain types of statutory awards.

11 10 Reference: The Stock Options Book section 10.1 Employee vs. Non employee Employee grants. ASC 718, formerly FAS 123(R) governs the expensing of employee equity compensation awards, including those granted to non employee members of the board of directors. Requires the calculation of the fair value of each award using an option pricing model, based on the analysis of historic transaction activity. The fair value of each award is calculated at the time of the grant and the expense for the award is recognized over the service period of the award (usually the vesting term). This fair value generally does NOT change over the expensing period, even if the assumptions used turn out to be incorrect. 066 Measurement of Compensation Cost > Options & SARs 080 Valuation Factors > Required Factors So we ve covered the definition of an employee and non employee, and now we re going to compare and contrast the accounting treatment of awards to those two groups, starting with accounting treatment for employee awards under ASC 718. Until the mandatory implementation of FAS123(R) in 2005, a company could basically claim that there was no compensation expense associated with equity compensation awards. As equity compensation awards became more commonly used and the size of awards increased to incentivize executives, the SEC felt that using the intrinsic value method that resulted in zero expense on the company s books did not accurately portray the financial impact of equity compensation awards and could be perceived as deceptive to shareholders and investors. So the FASB developed standards for accounting for the compensation expense related to equity compensation awards and refined them over a period of years until they became mandatory in 2005 as FAS 123(R). When GAAP was codified in 2009, FAS 123R became ASC Topic 718. ASC 718 governs the expensing of employee equity compensation awards, including those granted to non employee members of the board of directors. It requires the calculation of the fair value of each award using an option pricing model, based on the analysis of historic transaction activity. The fair value of each award is calculated at the time of the grant and

12 the expense for the award is recognized over the service period of the award (usually the vesting term). Once the fair value is calculated, it does not change unless the award is later modified, even if the assumptions used to make the calculation later turn out to be incorrect. This is called Equity treatment or equity accounting.

13 11 Fair Value vs. Fair Market Value IMPORTANT DISTINCTION: Reference: The Stock Options Book section 10.2 Fair Value is a calculated expense reached by applying an option pricing model. Fair Market Value is equal to the current trading price of the underlying stock. 080 Valuation Factors > Required Factors I want to point out here the distinction between FAIR VALUE, which is a calculated estimation of the value of an equity compensation award, and FAIR MARKET VALUE, which for our purposes is the sales price of the underlying stock. This is a very important distinction and because the terms are so similar it is easy to get mixed up. So remember while you re studying and especially while you re taking the exam if the word MARKET is in the phrase it refers to stock price and if the word MARKET is MISSING then it s asking about a calculated value.

14 12 Reference: The Stock Options Book sections , 10.4 ASC 718 Service Periods Explicit: The stated vesting period of the award (e.g. time based, 33% Annually over 3 Years). Derived: For market based awards (vesting is contingent of targets related to the stock price), the service period timeframe will be computed under a mathematical model (e.g. When stock price increases by 20%, output of a model like Monte Carlo). Because a simulation is used to model the outcome, the calculation is not changed even if the service period actually becomes known or circumstances change. Implicit: For performance based awards, the period of time over which the performance target is expected to be achieved (e.g. 100% upon project completion, assumed to be in 4 years). Changes to this expected period, have remaining expense recognized over the remaining period (no adjustments). 684 Recognition > Derived Service Period 685 Recognition > Explicit Service Period Before we move on to expense attribution, let s talk about service periods because the service period is the period over which the expense is attributed or recognized. The Syllabus keeps moving pieces of these around between Levels 1 and 2 so it s always good to have a review of them. So, explicit service periods are time based vesting, laid out dates, known service periods up front. Implicit service periods and derived service periods are typically associated with performance awards. The implicit service period is the type of service award where the goal is reached when something occurs like upon completion of a project or the release of a new product or an earnings goal is met. That could happen on any day. There is no assigned date of vesting. It is assigned to when and if an event occurs so you don t know on the grant date what the service period will be because it could be two months, it could be two years, it could be two decades, you don t know, and this is where implied service periods come into play because you will amortize the expense over the period in which you believe the target will be achieved. For some reason, Implicit Service Period was moved to Level 2 this year, so we won t go into more detail, but you should know about it anyway.

15 A derived service period, again, these are typically found with performance awards, and specifically, market based performance awards. So the performance criteria is in some way tied directly to the company s stock price. For example the performance will be measured and the shares will be earned when the stock price goes up by $10 per share, when the stock price increases by 50%, or something like a TSR, a total share holder return or relative TSR. Any performance measurement tied to stock price, which does not include an earnings per share goal. Those service periods would be derived service periods. They are actually calculated by a mathematical model. A mathematical model is applied and one of the outputs of the model is the service period date over which the expense will be determined. That model is called a Monte Carlo model or a Monte Carlo simulator and it will output the fair value for your market based performance awards and the derived service period for your market based performance award. And when you have a derived service period, it s a fixed calculation. It s a done deal. So, you don t change it for changes in circumstance. Once the model calculates an expense and a service period, that s the service period that will be followed and that s the expense that will be taken. If you re going to make any note today when it comes to performance awards, know the key difference between market based and not market based, which we will come back to a few more times before we re done today.

16 13 Reference: The Stock Options Book section 10.1 Employee vs. Non employee Non employee grants. ASC Subtopic governs the expensing of non employee equity compensation awards. Requires the calculation of an estimated expense using an optionpricing model. Requires expense recognition based on variable accounting methods adjusting the expense (true up) every reporting period until the award vests. 906 ASC > Awards to Non Employees > Measurement & Recognition 035 ASC > Awards to Non Employees > Measurement Date ASC Subtopic governs the expensing of non employee equity compensation awards. It requires the calculation and accrual of an estimated expense based on variable accounting methods. This is accomplished by estimating the value at the time of grant using an option pricing model, and adjusting the expense recognized as the value of the underlying stock changes throughout the service period of the award, with a final adjustment of the expense at the time of vesting this is called Variable accounting. I ve included these two inset images because they address the issue of Measurement Date as it applies to non employee awards, as itemized in the Level 1 syllabus. As you can see by the top inset, the Measurement Date for awards subject to variable accounting is the date of vesting and, as demonstrated in the bottom image, the application of variable accounting means that the expense is remeasured at each reporting date and the amount recognized on that reporting date is adjusted according to any changes in the underlying option pricing model input factors since the previous measurement date. Even though non employee option grants generally have a known number and price of shares at the time of the award, we must apply the variable accounting standards because

17 ASC tells us to. FASB contemplates a future revision to elaborate on the valuation and expensing of non employee compensation awards.

18 14 Reference: The Stock Options Book section 10.1 Equity Award vs. Liability Award Equity Award vs. Liability Award. In general, awards that pay out in stock are equity awards; cash or non employee option awards are liability awards. Equity Awards. Expense for equity awards is measured on the grant date and not subsequently adjusted unless the award is modified. Liability Awards. Expense for liability awards is not determined until the grant is settled. Fluctuations in fair value before settlement increase or decrease expense recognized. 906 ASC > Awards to Non Employees > Measurement & Recognition 826 Valuation Factors > Equity Treatment > FV Not Adjusted So the first step is to determine whether an award is an "equity" award or a "liability" award. Generally speaking awards that pay out in stock are equity awards and awards that pay out in cash are liability awards, with the exception of non employee awards which are required by statute to be treated as liability awards. You ll learn the specifics of liability treatment in Level 2 but we want you to have this slide now because it is often used as a synonym of variable accounting. As previously described, Grants that receive equity treatment are measured on the grant date. For awards that receive equity treatment, the fair value measured on the grant date, and that amount is expensed over the service period of the award. These awards are not subsequently adjusted for stock price fluctuations, changes in initial estimate of fair value, or changes in assumptions used to determine fair value. The only adjustment made to awards receiving equity treatment is when the expense is adjusted for forfeitures of unvested awards and modifications made after grant date. The accounting treatment afforded liability awards is much the same as the treatment afforded equity awards, except for one major difference the value of the award is remeasured at the end of each reporting period until the award is settled. In other words, liability awards are subject to variable accounting.

19 Liability treatment means that the expense is not determined until the grant is settled. Thus, any changes in fair value that occur before settlement can change the expense recognized for the grant. This is commonly referred to as mark to market. Awards treated this way lead to more volatile accounting numbers than equity awards because fluctuations in fair value before settlement increase or decrease the expense recognized at each reporting period, with the final amount trued up when the award is settled or vested. For non employee option awards the settlement date is the vest date.

20 15 Reference: The Stock Options Book chapter 10, section 10.1, 10.4 Accounting Process 1. Measurement Date. The fair value of an award is determined on its measurement date. Grant date for employee awards, vest date for non employee awards. 2. Service Period. The period of time over which the expense will be recognized. 3. Measurement. In this step you measure how much the expense will be. For options you ll use an option pricing model to measure the fair value of the award. 4. Recognition. In this step you recognize the incremental expense of the award over the service period. a. Equity treatment, the fair value does not change for the life of the award. b. Liability treatment, the fair value is adjusted at each reporting period until final settlement at the end of the service period. Private companies can choose to recognize the intrinsic value of non employee awards instead of the calculated fair value. GENL Accounting Process 826 Valuation Factors > Equity Treatment > FV Not Adjusted Here s a slide that provides a process outline for accounting for equity compensation awards. Whether the award is subject to equity treatment, variable accounting or liability treatment, you will always follow this same process. 1. First you decide, according to accounting principles, what the measurement date is. 2. Then you decide over what period of time the award will be outstanding. This is the Service Period. 3. Then you measure how much the expense will be. For options, typically using an option pricing model, like Black Scholes. 4. Then you decide how you want to enter, or recognize, that expense into the company s financial records. For employee awards that settle in stock, the measurement date is generally the grant date using an option pricing model. For these awards, equity treatment requires that this grant date fair value of time based, stock settled awards is not adjusted during the life of the award even if the assumptions used in the option pricing model turn out to be incorrect. For stock settled awards granted to non employees, the measurement date is the vest date.

21 For those awards, the company will use an option pricing model to estimate the award s fair value on the grant date and then will use the same model to re measure the value at every subsequent reporting period until the settlement date. The option pricing model factor that changes at each reporting period is the expected term and we ll talk about that more when we cover the option pricing model factors in the measurement topic. The recognition step is how you decide to account for the compensation expense. There are numerous ways to do this step and you will still be learning about some of them in your Level 3 studies. For now you just need to know that after the expense is measured, that amount will then be broken up into segments and one segment of the expense will be entered into the company s accounting records at each reporting period. A simple visual on that would be taking a pie, cutting it into 8 pieces and eating one piece each day for 8 days.

22 16 Accounting Process Measurement Recognition for equity award Unamortized Amortized True up variable accounting GENL Accounting Process In fact, here you go. In the upper left image you re measuring the pie, deciding what value you want to give to the entire pie. You decide this value based upon the state of the pie at the time it is made. Then you slice it up and decide what value each segment will have. For now we re just going to say that each segment is one eighth of the pie. So every day, you ll take out a piece and eat it that s the amortized slice, the value that goes onto the company s books at each reporting period. When all the slices are gone, all of the expense has been amortized and the expense for that award has been fully recognized. The expense for an equity award will stay the same all the way through the 8 days even if some slices are served with whipped cream or iced cream or without a topping. If the award is subject to variable accounting, the value of the amortized slice is redetermined on the day it is served. So, for example, the company suddenly decides to start declaring dividends on its stock, that would be like adding whipped cream, and under variable accounting we d have to adjust the value of the slice because the underlying factors have changed.

23 Equity Award Accounting 17 Reference: The Stock Options Book sections 10.1, 10.4 Under ASC 718, which of the following statements is true about the compensation expense associated with timevested stock options granted to employees? a. The compensation expense is frequently zero. b. The compensation expense is equal to the full fair market value of the granting corporation's stock on the date an option is granted. c. The compensation expense is equal to the fair value of the option, as determined using an option pricing model. d. The compensation expense is never zero. Let s take a question on this before we move on. MODERATOR READS QUESTION AND INSTRUCTIONS ON ANSWERING IN CHAT BOX.

24 18 Reference: The Stock Options Book sections 10.1, 10.4 Equity Award Accounting Correct answer: c The compensation expense is equal to the fair value of the option, as determined using an option pricing model. Explanation: Under ASC 718, the fair value of employee stock options is determined using an option pricing model. Fair value is distinct from fair market value, which generally refers to the trading price of the underlying stock. ASC 718 requires companies to place a fair value on employee stock options as of the date of grant, and to reflect that value as a charge to earnings during the service period. 826 Valuation Factors > Equity Treatment > FV does not change The correct answer is c The compensation expense is equal to the fair value of the option, as determined using an option pricing model. Under ASC 718 an award s fair value is determined on the grant date using an option pricing model. Again, don t confuse fair value with fair MARKET value.

25 NCEO s CEP Exam Preparation Course Spring 2018 Level 1 Core Topic: Accounting Presented by Tim McCleskey, CEP Stock & Option Solutions Moderated by Achaessa James, CEP, NCEO

26 Level 1 Accounting Topics 19 ASC ESPP Forfeiture Rate Grants to Employees International Measurement of Compensation Costs Recognition of Compensation Cost Role of FASB Valuation Factors Valuation Models Now let s take a look at the related topics of Valuation Factors and Valuation Models

27 Accounting Valuation Required Factors 20 Present factors Stock price Exercise price Risk free interest rate Reference: The Stock Options Book section 10.2 Forecasting factors Dividend yield Volatility of underlying stock Expected term of option 080 Valuation Factors > Required Factors For non market conditioned awards, the standard six required factors that an option pricing model must include can be categorized as either present factors or forecasting factors. The present factors are the current price of the underlying stock, which is set by the market for publicly traded stock or set by the board of directors for privately held companies; the exercise price, which is set on the grant date by the board of directors in relation to the underlying stock price; and the risk free interest rate, which is set by the federal government. The forecasting factors are those factors which require the company to estimate what will happen in the future. The dividend yield factor is easy enough to estimate based on prior period dividends. Volatility and expected term, even though they can be based on historic trends, are a bit more complicated than simple averaging.

28 21 Reference: The Stock Options Book section 10.2, Exhibit 10 2 Option Pricing Model Factors 1. exercise price; 2. fair market value of the underlying stock on the date of grant; 3. expected term is the length of time the option is expected to be outstanding and unexercised; 4. expected volatility of the underlying stock; 5. expected dividend yield for the underlying stock; and 6. risk free interest rate for the option s expected life. 080 Valuation Factors > Required Factors 075 Valuation factors > Expected Term 079 Valuation factors > Interest Rate 672 Valuation factors > Volatility 737 Valuation factors > Volatility for Private Companies Option Pricing Models. ASC 718 does not name a specific model to use, but requires that any option pricing model incorporate the following factors: 1. exercise price; 2. the fair market value of the underlying stock on the date of grant for non public companies the setting of this value is regulated by Internal Revenue Code Section 409A; 3. expected term or expected life this is the length of time the option is expected to be outstanding and unexercised. For employee options, this is generally shorter than the award s contractual term. For non employee options, this is generally the award s actual contractual term. The expected term is a very important factor because it is used in determining the remaining factors. 4. expected volatility of the underlying stock this is the diversity in magnitude and direction (up or down) of a company s dividend adjusted stock price returns over a specific period of

29 time. For public companies, this is a best estimate of the market volatility over the expected term of the option. Public companies often use historic volatility rates to assist in this determination. Private companies that cannot produce a reliable estimate of their stock volatility can look at similar public companies or industry indices. Public companies are not allowed to use industry indices; 5. expected dividend yield for the underlying stock over the expected term of the award. For non public companies this is assumed to be 0; and 6. the risk free interest rate for the option s expected life. The statute says this should be equal to the zero coupon rate on U.S. government issues, but that number is not readily accessible, so generally companies use the current Treasury rate applying to bills or bonds with terms equal to the award s expected term.

30 22 Level 1 Valuation Factors Which of the following factors is NOT a necessary input under an option pricing model that meets the requirements of ASC 718? a. Expected volatility of the underlying shares b. Grant date fair market value c. Exercise date fair market value d. Expected term of the option Go to polling question #1 Let s take a question on what we ve just covered MODERATOR READS QUESTION AND INSTRUCTS ON ANSWERING IN CHAT BOX

31 23 Level 1 Valuation Factors Correct answer: c Exercise date fair market value Explanation: ASC 718 specifies six inputs that optionpricing models must include. Exercise date fair market value is not among them. Reference: The Stock Options Book section Valuation Factors > Required Factors The Correct answer: c Exercise date fair market value. ASC 718 specifies six inputs that option pricing models must include. Exercise date fair market value is not among them.

32 24 Reference: The Stock Options Book section 10.2 Option Pricing Models Black Scholes is a set formula with a relatively predictable outcome. Designed to value European style exchange traded short term options exercisable only upon expiration, the FASB has accepted this model for valuing U.S. employee stock options by allowing the contractual term factor in the European model to be replaced by an expected term factor. Lattice refers to a type of model, not a specific model, which includes binomial, trinomial, and multinomial models. Specifically designed for valuing American style exchange traded options, these models create a lattice of possible future outcomes, and then determine a value based on a weighted, averaged, and discounted calculation of those outcomes. Monte Carlo Methods are most widely used in valuing Asian options and in put/call option analysis, where multiple levels of uncertainty and complicated terms make using the Black Scholes model impractical. (Level 3 topic) 081 Valuation Models > Black Scholes 657 Valuation Models > Lattice The three most common models used for estimating fair value are Black Scholes, Lattice, and Monte Carlo Black Scholes is the most frequently used option pricing model. Originally designed to value European style exchange traded short term options that are exercisable only upon expiration, the FASB has accepted the Black Scholes model for valuing U.S. employee stock options (even though they can be exercised at any time and over a longer period of time) by allowing the contractual term factor in the European model to be replaced by the expected term factor. It is a set formula with a relatively predictable outcome. Lattice refers to a type of model, not a specific model, which includes binomial, trinomial, and multinomial models. Specifically designed for valuing American style exchange traded options, which can be exercised at any point in time prior to expiration, these models create a lattice of possible future outcomes, and then determine a value based on a weighted, averaged, and discounted calculation of those outcomes. To produce valid results, lattice models require significantly more historical transaction data and trading history than most non public companies have. Monte Carlo Methods are most widely used in valuing Asian options and in put/call option

33 analysis, where multiple levels of uncertainty and complicated terms make using the Black Scholes model impractical. The basic steps in using a Monte Carlo Method are to generate several thousand random price paths for the underlying security using simulation techniques, and to then calculate the associated exercise value of the option for each random price path. The exercise values are then averaged and discounted to arrive at a current day value. As you can imagine, Monte Carlo Methods are very complicated and rarely worth the expense of building the modeling tool for non public company valuations. You won t need to study anything about Monte Carlo Methods for Level 1.

34 25 Reference: The Stock Options Book section 10.2, Exhibit 10 2 Valuation Factors Impact on Value Option pricing model factors effect on value Fair market value of underlying stock on grant date Exercise price (if at or below FMV) Expected term of option Expected volatility of underlying stock Risk free interest rate Expected dividend yield on underlying stock In equity accounting, the fair value is set at the time of grant and is not adjusted as these factors change throughout the life of the grant. In liability accounting, the fair value of existing awards is adjusted each reporting period as these factors change. 080 Valuation Factors > Required Factors 625 Valuation factors > Impact on Value > Dividend Yield 076 Valuation factors > Impact on Value > Expected Term 077 Valuation factors > Impact on Value > Interest Rate 078 Valuation factors > Impact on Value > Volatility Let s look at the option pricing model factors again and the effect each factor has on the calculation of the fair value of the award FMV: for public companies the FMV is the current trading price, for private companies the FMV is set by the board of directors. Naturally if the stock is worth more, the value of the award will be higher Exercise price The exercise price must be set by the board or by a committee of the board. Assuming that the exercise price is equal to the FMV, an increase in strike price has the same effect as an increase in the FMV when the stock is worth more, the option is also worth more. Expected term: For employee awards this is usually a calculated time period shorter than contractual term, because most employees exercise long before their options are due to expire. For non employee awards it must be the full contractual term, which is the full vesting period. The longer the expected term the higher the fair value because the more

35 time the award is outstanding the more time it has for the underlying stock to increase in value Expected term isn t an overt factor in a lattice based model. Instead, it is projected through a variable called the suboptimal exercise factor, which is the ratio by which the stock price must increase before it becomes likely employees will exercise. The model then emphasizes the outcomes that fit this ratio. Historical exercise behavior is part of this, but not the whole story. Companies can consider factors that could cause future behavior to differ from past behavior. Lattice models also include likelihood that employees will terminate and be forced to exercise sooner than they otherwise would have, which also goes to expected term. However, models are NOT allowed to include likelihood of forfeiture, so any consideration of forfeiture is instead applied when the expense is recognized. Expected volatility: For public companies, stock price history is a guide, but again if expectations for the future (meaning over the expected term) are different for some reason, this measure should be adjusted. Higher volatility means more valuable options because there is a greater likelihood that the stock price will increase greatly. For private companies, if they can t produce a reliable estimate they can look at similar public companies, their peer companies, or us industry indices. Risk free interest rate: Most companies use Treasury rate with term equal to option s expected term. Technically supposed to be Treasury rate on zero coupon government issues, but that figure is often not readily available. A higher interest rate means a higher fair value because it s an indicator that the stock price will be higher in the future. Expected dividend yield: This is the one factor that, when it is raised, the calculated fair value of the options is reduced. Options don t come with dividend so dividends expected to be paid to other shareholders means that the option holder is missing out on that benefit. In equity accounting, the fair value is set at the time of grant and is not adjusted as these factors change throughout the life of the grant. In liability accounting, the fair value of existing awards is adjusted each reporting period as these factors change. The Stock Options Book Exhibit 10 2 is a great exhibit to tab in your textbook as it provides this list of effects with a bit more detail.

36 Level 1 Accounting Topics 26 ASC ESPP Forfeiture Rate Grants to Employees International Measurement of Compensation Costs Recognition of Compensation Cost Role of FASB Valuation Factors Valuation Models Now let s look at the Measurement of Compensation Costs

37 Measurement of Compensation Expense 27 Reference: The Stock Options Book section 10.1, , Appreciation Awards: Stock Options the right to purchase a share of stock at a specific price at the time of vesting. Expense is measured by using an option pricing model. Stock Appreciation Right the right to receive the difference between the value of a share of stock on the grant date and the value of stock on vest date. Full Value Awards: Restricted Stock Award (RSA) the right to receive an actual share of stock at time of vesting. Restricted Stock Unit (RSU) the right to receive the full value of a share of stock at the time of vesting. 070 Measurement of Compensation Cost > RSA/RSU 066 Measurement of Compensation Cost > Options and SSARs There are basically two types of awards full value awards and appreciation only awards. Full value awards give the recipient the right to receive either an actual share of stock, like a Restricted Stock Award, or a Restricted Stock Unit which gives the recipient the right to receive the full value of a share of stock upon vesting. Appreciation only awards give the recipient a right which has a net value equivalent to the appreciation of the stock between the grant date and the vesting or exercise date. A stock option gives the recipient the right to purchase a share of stock in the future based on the stock price today so the ultimate benefit will be the appreciation in the value of the stock since the grant date, the difference between the stock price on exercise date less the payment for the stock which is the price on the grant date. A stock appreciation right gives the recipient the right to receive the appreciation in the stock price between the price on the grant date and the price on the vest date. For a stock appreciation right, there is no purchase price.

38 Measurement Stock settled SARs 28 Reference: The Stock Options Book section Previously subject to variable plan accounting under APB 25 Now under ASC 718 treated the same as stock options Fair value calculated on date of grant using an option pricing model Expense is recorded over service period Expense is reversed for unvested, forfeited awards Expense is not reversed for vested awards that expire unexercised 066 Measurement of Compensation Cost > Options and SSARs The measurement of expense for Stock Settled Stock Appreciation Rights was moved from Level 3 to Level 1 in 2017, so it s a fair bet that you ll receive an exam question on this. Since the implementation of FAS 123R, now ASC 718, accounting for stock settled stock appreciation rights is exactly the same as for non qualified stock options. Fair value for stock settled SARs is calculated on the date of grant using an option pricing model and then the expense is recorded over the service period of the award. The expense is reversed for unvested or forfeited awards, but it is not reversed for awards that expire unexercised.

39 Measurement of Compensation Expense 29 Reference: The Stock Options Book section Accounting for Restricted Stock Awards and Restricted Stock Units is different than accounting for options Measurement. Expense for RSA/RSU is based not on an option pricing model but on the intrinsic value of the award on the grant date Intrinsic value. Stock s fair market value less price paid per share (if any) = Fair Value for RSA/RSU (compensation cost) 070 Measurement of Compensation Cost > RSA/RSU The expense for RSAs and RSUs is based on the intrinsic value of the award on the grant date, not on an option pricing model. The intrinsic value is calculated by deducting the amount paid for the stock from the stock s fair market value on the grant date.

40 Level 1 Accounting Topics 30 ASC ESPP Forfeiture Rate Grants to Employees International Measurement of Compensation Costs Recognition of Compensation Cost Role of FASB Valuation Factors Valuation Models Next we will dive into Forfeitures and Recognition of Compensation Cost

41 31 ASC 718 True Ups Company estimates the percentage of forfeiture, cancellation before vest, it expects. Expense recognition is the calculated fair value reduced by the estimated forfeiture rate. Reference: The Stock Options Book section 10.4 Must adjust future expense recognized based on actual forfeitures at end of service period a True Up Time based award expense final true up at end of vesting based on actual forfeitures, not estimated forfeitures ESPP expense trued up based on actual shares purchased Performance awards trued up based on actual settlement Market based performance awards NOT trued up because likelihood of achieving vesting is included in original fair value measurement Pre-ASU Forfeiture Rate > Initial Estimate For purely time based awards, the company is required to estimate the percentage of forfeitures, which are awards cancelled prior to vesting. The expense to be booked is reduced by this estimate of forfeitures. The company must later adjust expense recognized based on the actual forfeitures versus the estimate. For 423 ESPP plans expense is trued up based on actual shares purchased. For performance based awards, the expense is booked based on the expectation as to the achievement of the underlying goals. The expense recognized will not be reduced or reversed if market based options fail to vest due to a missed target. If the participant terminates prior to vesting, the expense will be reversed. RSAs and RSUs expense will be adjusted for forfeitures unless there is a market based performance condition.

42 32 Reference: The Stock Options Book section 10.4 Accounting for Forfeitures As They Occur Under ASU companies may now elect to only account for forfeitures as they occur. Full amount of calculated fair value expense is recorded As grants forfeit, previously recorded expense attributable to forfeited portion of grant is reversed Requires affirmative policy election to adopt this method. Election is applied to all awards granted by company (cannot estimate forfeitures for some grants but not others) A change in election is a change in accounting policy that requires Preferability letter from auditors Retrospective application to company financials 951 Forfeiture Rate > Accounting for Forfeitures As They Occur In 2016 FASB issued ASU to provide another process for handling forfeitures for service based awards. Under the new procedures, where a forfeiture occurs as a result of a service based vesting condition not being met, a company can choose to continue applying estimated forfeiture rates as before, using either the static or dynamic method, or it can choose to account for forfeitures only as they actually occur. This means that the company will recognize the full calculated fair value of an award on either a straight line or graded basis, and then reduce that expense as forfeitures actually occur, reversing any prior expense recognized for the forfeit awards. Companies must make a policy decision as to which of these methods to use for forfeitures of service based awards. The election must be applied to all awards granted by the company the company can t do estimated forfeitures for some awards but not for others, so it s all or nothing. If a company chooses to adopt this election, it s considered a change in accounting policy and will require a letter from the company s auditors explaining why the new method is preferable to the old method, and must be retrospectively applied to the company s financials. Companies that do not adopt ASU must continue adjusting expense for estimated

43 forfeitures. So let s look at how those estimated forfeitures will be applied.

44 33 Reference: The Stock Options Book sections 10.4, Recognition of Compensation Cost Employee Grants Fair value does not change once it is calculated on the grant date even if the underlying assumptions prove incorrect. Under ASC 718, fair value is expensed over the service period of the award The amount of amortization must always be at least as great as the number of shares actually vested Adjusted for forfeitures Forfeitures will either be recognized as they occur (ASU ) or Expense is reduced by the estimated expected forfeiture rate, over the service period If estimated, expense must eventually be trued up to actual forfeitures. 684 Recognition > Derived Service Period 685 Recognition > Explicit Service Period All of these rules about measurement lead us to the final point of equity compensation accounting and that is how to recognize the compensation cost associated with the awards on the company s financial statements. Options and SARs that vest based on achievement of performance targets use an Implicit Service Period equivalent to the estimated service period. If that changes, the recognition period would be adjusted and unamortized expense recognized prospectively. 423 ESPPs are typically non compensatory. If not, the fair value is usually set on grant date using the Black Scholes model. Expensed from Offering Date to Purchase Date. RSA/RSUs Fair market value at grant less amount recipients pay for shares is recognized over service period. Cash settled SARs. Fair value recognized when award is exercised or expires. Phantom shares. Intrinsic value is recalculated each reporting period. For a standard option award, we ve already defined Service Period as the period of time over which the compensation cost will be recognized. For Level 1 we re only focused primarily on time based awards, awards that vest over a certain period of time, and that vesting period generally defines the service period, so for this discussion we ll be talking about awards with

45 an Explicit Service Period and for Level 1 questions you can always count on the fact scenario stating the length of the vesting period if that element is being tested in the question. As mentioned before, awards to employees are valued at the grant date and the expense stays the same through the life of the grant, whereas awards to non employees must be adjusted at each reporting period until the award is fully vested (mark tomarket). As a Level 1 candidate you don t have to know how to do the adjustment, you just need to know that the expense for a non employee award would be subject to adjustment each reporting period. Having made it clear that the calculated fair value does not change for employee awards, ASC 718 nevertheless states two other rules which modify that statement a bit. First, the amount of amortization must always be at least as great as the number of shares actually vested. The textbook gives the example of an award of 200 options with a 2 year vesting schedule that vests 50% after 6 months and the remaining 50% over the last 18 months. So if you were recording your expense on a quarterly basis and simply divided up the 2 years into 8 quarters and then divided the total expense by 8, at the 6 month vesting mark you would only have expensed 25% of the award, instead of the actual 50%, and that would not conform to ASC 718. This doesn t change the amount of the fair value, only when that value is recognized as expense.

46 34 Reference: The Stock Options Book sections 10.2, 10.4, Measurement vs. Recognition Measurement. Option pricing model factors are used to estimate fair value: Fair market value of underlying stock Exercise price Expected term of option Expected volatility of underlying stock Expected dividend yield on underlying stock Risk free interest rate Recognition for employee grants. Estimated forfeiture rate is applied at time of expense recognition: Fair value does not change Amount of fair value recognized is reduced by forfeitures (estimated rate or real time) Final amount recognized is trued up to reflect actual forfeitures 080 Valution Factors > Required Factors 066 Measurement > Options & SARs 826 Valuation Factors > Equity Treatment > FV not adjusted 880 Forfeiture Rate > Initial Estimate 951 Forfeiture Rate > Accounting for Forfeitures As They Occur 685 Recognition > Explicit Service Period It s a two step process. First you use the option pricing model to estimate the fair value. Then at the time of recognition, the amount expensed is adjusted to reflect the percentage of options expected to be forfeit before vesting and eventually trued up to reflect actual forfeitures. This is considered to be an adjustment of the expense recognition, not a change in the award s grant date fair value.

47 35 Reference: The Stock Options Book section 10.4 Recognition of Compensation Cost Example: an award with a calculated $1000 fair value vests 25% each year over 4 years Straight line Accrual The fair value of the entire award is recognized in equal installments across the vesting period of the award Example: will recognize an expense of $250 each year for four years on the vest date of each tranche Accelerated Accrual (FIN 28, also graded vesting ) Each vesting tranche is treated as a separate award and the amount of each tranche that vests during the reporting period is recognized during the reporting period Example: Each tranche has a value of $ Recognition > Straight line v Accelerated Once the fair value of the award has been calculated, and the estimated forfeiture rate calculated and applied (or not if the company has adopted ASU ), the company must decide how to book that expense in their accounting system. There are two accrual methods that Level 1 students need to know about straight line accrual and accelerated accrual or the FIN 28 method. Under straight line accrual, the fair value of the award is divided by the length of the vesting term and the expense is recognized in equal installments as the award vests. Using the example on this slide, where the award has a total fair value of $1,000 and a four year vesting term, the expense would be recognized in increments of $250 per year for four years. It s like the earlier pie example. Accelerated vesting treats each vesting tranche as a separate award and recognizes a portion of the expense for each tranche during each reporting period. The graphed example sets out how the expense would be recognized over the term of the award. You can see how a portion of the expense is recognized for each tranche during each year that it is outstanding, which means that the first tranche is fully expensed in the first year, the second tranche will be expensed in year one and year two, the third tranche in years 1 through 3 and the fourth tranche has a portion of the expense recognized in each of the four years. If you look at the bottom totals, you ll see how in this common example there is more expense recognized in the beginning of the service period, and that s why it s called accelerated accrual.

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49 36 Recognition for equity award Straight line accrual Accelerated accrual Amortized Day 1 Day 2 Day 3 Day Recognition > Straight line v Accelerated So, going back to our pie illustration, the top image is straight line accrual over 4 years. The pie is divided into 4 parts and one slice is eaten each day. The bottom image demonstrates accelerated accrual. Here you can see that the pie is divided into 4 slices, but then the second slice is divided into 2 parts, the third slice into 3 parts and the fourth slice into 4 parts. On day 1 you eat the full slice 1, plus half of slice 2, a third of slice 3, and a quarter of slice 4. On day 2 you ll eat the remaining half of slice 2, another third of slice 3, and another quarter of slice 4. On day 3 you ll eat the remaining third of slice 3 plus one quarter of slice 4. And then on the fourth day, all you ve got left to eat is the final quarter of slice 4. So now you should have this pie image burned into your brain.

50 Level 1 Accounting Topics 37 ASC ESPP Forfeiture Rate Grants to Employees International Measurement of Compensation Costs Recognition of Compensation Cost Role of FASB Valuation Factors Valuation Models We are down to our final Accounting topic employee stock purchase plans

51 38 Reference: Selected Issues sections thru Section 423 plans and ASC 718 Non Compensatory Plan. To avoid being treated as an expense on the income statement, the plan must: Offer a purchase discount of no more than the cost of raising capital in a public offering (5% discount safe harbor) Have no option like features (most notably look back feature) Allow substantially all employees to participate but limit enrollment period to 31 days after purchase price is set Results in zero accounting expense Compensatory Plan. The company must recognize expense on the income statement for a compensatory plan: Most ESPPs have a bigger purchase discount (often up to the statutory maximum of 15%) or a look back feature and so will recognize an accounting expense. REMEMBER: Accounting status has no effect on tax qualification Tax Qualified Plan. Either way, the ESPP can still qualify as a Section 423 Plan for tax purposes as long as it meets the statutory requirements. 618 ESPP > Fair Value There are two accounting categories for an employee stock purchase plan: A compensatory plan, which means that the company will recognize a compensation expense on the financial statement just like regular options or A non compensatory plan, which means that the plan will have a zero accounting expense. Either type of plan can also be a tax qualified plan under Section 423 of the Internal Revenue Code as long as it meets all the statutory requirements, which you learned about in the taxation webinar. In the past, as long as a plan met the requirements to be a tax qualified plan, it was automatically a non compensatory plan but that changed under ASC 718. Since 2005, ESPPs that have a look back feature or offer a discount of more than 5% on the purchase date FMV without justifying it must result in the plan being treated as an expense on the company s income statement, so it was considered a compensatory plan. The important thing to remember here is that the accounting rules do nothing to change the tax law. Try to think of taxes and accounting as two separate strands you ve got tax law on one and accounting rules on the other. The tax law strand describes the conditions under

52 which an ESPP is eligible for favorable tax treatment under Internal Revenue Code Section 423. The accounting strand describes the conditions under which a company has to show the expense for its plan on its books under ASC 718.

53 ESPP Expense Measurement & Recognition 39 Reference: Selected Issues sections 9.6.4, , GPS: ESPP section 11.3 Compensatory ESPP Expense Process Grant Date. Generally the date when the ESPP offering begins. Requisite Service Period. Generally the period from the offering date/grant date through the purchase date. Measure the expense. Calculate fair value, along with an estimate of how many shares are likely to be purchased during the offering period. Recognize the expense. Estimated expense is recognized from offering date to purchase date and will be trued up to actual shares purchased after purchase occurs if the final number of shares purchased differs from the estimated number of shares that would be purchased. Reference: The Stock Options Book section and GPS: ESPP section 11, see, also Exhibit 3 1, Example 3, for an illustration of an overlapping offering period with multiple purchases. 618 ESPP > Fair Value 874 ESPP > Grant Date 061 ESPP > Accrual Period Just like the accounting process for stock option, you will first have to establish the measurement date, better known in this context as the Grant Date, which is usually the first day of the ESPP offering period. And the Requisite Service Period, which is generally the period from the Grant Date through the purchase date for a straightforward plan with a single offering and purchase period. Then you ll have to measure the expense, combining the calculated fair value amount with the estimated number of shares that are likely to be purchased during the offering period. And, finally, recognize the expense. The expense may be trued up to actual shares purchased on an individual basis after the purchase is completed if the number of actual shares purchased changes due to a change in salary, bonus, or the like, for example if a participant s contribution rate is 10% of her total income and she gets a big bonus in the middle of the offering period which significantly increases her total contributions, or if the participant terminates employment prior to the purchase date and does not participate in the purchase at all.

54 40 ESPP Expense Measurement Component Measurement Approach ASC Plain Vanilla: $ Grant Price x % Discount = Fair Value With Option like Features (e.g., a look back feature): Reference: The Stock Options Book section , GPS: ESPP section , ESPP > Fair Value 874 ESPP > Grant Date 875 ESPP > Look Back 876 ESPP > Option Like Feature 877 ESPP > Purchase Discount It sounds simple enough, but the fair value calculation is a bit different for ESPP options than for stock options. The fair value of an ESPP is determined using the component measurement approach. It is generally determined using a Black Scholes model, but may include up to three separate components. When those components are included, each design feature of an award is valued separately, then those values are added together to determine the fair value of the award. This is true for both non qualified and tax qualified plans and applies to awards that are granted to both US and non US employees. Assuming the company does not pay dividends on its stock, the simplest type of ESPP offers a discount on the stock price on the purchase date and does not have a look back feature. For calculating the expense, the company would use the offering date FMV to estimate the expense based on the required expensing factors for ESPPs, recognize that expense over the service period (which corresponds to the purchase period), and then true up the expense after the actual purchase date price is established and the purchase is made. Since many ESPPs have option like features, such as look backs, the fair value calculation

55 becomes a bit more complicated, requiring multiple components and option pricing models, including: A percentage of a share of stock, representing the Plan discount A percentage of a call option, representing the additional benefit the employee will receive if the stock price is higher on the exercise date, and A percentage of a put option, representing the guaranteed discount on the grant date stock price when the price is lower on the exercise date and more shares can be purchased. The Black Scholes option pricing model is generally used to calculate the call option and the put option components because the grant date and the purchase date are already known, so more sophisticated models aren t necessary. The remaining option pricing model inputs for calculating the put and call options are the same six that we use in calculating stock option fair value and are calculated similarly, keeping in mind that, in most cases, the stock price component for the option pricing model does NOT reflect the exercise discount of the Plan. You will not need to know how to do this calculation for the Level 1 exam, you will only need to know that this method of valuation exists.

56 41 ESPP Expense Measurement Reference: GPS: ESPP section , Exhibit 11 2, also sections through ESPP > Fair Value 875 ESPP > Look Back ASC is the accounting standard for ESPPs and lays out the accounting treatment for plans with look back features. The standard describes 9 types of plans and sets forth detailed accounting treatment for each type. The GPS:ESPP publication provides a summary chart of the 9 types and what makes them distinctive and then also a detailed analysis by each type as noted on this slide. You will not be required to know these types by heart but you would do well to review them thoroughly and mark them for easy access in your GPS:ESPP booklet.

57 Accounting 42 A public company grants ISOs to employees and NSOs to outside directors and outside consultants, and it maintains a Section 423 ESPP with a 15% discount. Which of the following are accounted for under ASC 718? a. All option grants and ESPP participation. b. Option grants to employees only, and ESPP participants. c. Option grants to employees and directors only, and ESPP participants. d. Option grants to employees and directors only, but not the ESPP participants since the plan is noncompensatory. Now let s take one more question before we finish this webinar. MODERATOR READS QUESTION AND INSTRUCTS ON ANSWERING IN CHAT BOX

58 43 Reference: The Stock Options Book section 10.1, 10.3, Accounting Correct answer: c Option grants to employees and directors only, and ESPP participants. Explanation: ASC 718 applies to compensatory equity compensation granted to employees. Because the ESPP offers a 15% discount, it is compensatory under the accounting standard and thus is reflected in the company's income statement. (In contrast, it is a noncompensatory plan for tax purposes, meaning participants are eligible for preferential tax treatment.) ASC 718 and the IRS also disagree about outside directors. The accounting statement specifies that outside directors are considered to be employees, even though they are nonemployees for tax purposes. Thus, the expense for outside directors' stock options is accrued under ASC 718, the same as for company employees. 039 Grants to Employees > Definition of Employee 906 ASC > Awards to Non Employees > Measurement & Recognition The correct answer is C. Option grants to employees and directors only, and ESPP participants. In this explanation we have two instances where the accounting rules diverge from tax law. 1) First the simple one, the IRS does not consider outside directors to be employees, but for the purposes of ASC 718, FASB does consider them to be employees. Further, the expense for awards granted to non employees, rather than being calculated with finality on the grant date, is estimated each period during which the award is outstanding, but the expense is not final until settlement. The other difference is in the treatment of Section 423 employee stock purchase plans. The IRS and accounting standards have different views on what makes a plan compensatory make sure you know who says what. If you didn t get this question right, you ll want to review the Level 1 taxation webinar, for a better understanding of Section 423 ESPPs.

59 Level 1 Accounting Topics 44 ASC ESPP Forfeiture Rate Grants to Employees International Measurement of Compensation Costs Recognition of Compensation Cost Role of FASB Valuation Factors Valuation Models ACHAESSA: So we ve completed all of the Level 1 accounting topics. Now I d like to open it up for general question and answer. You can ask your questions in the chat box or ask your questions out loud by pressing STAR 7 to unmute yourself when you have a question or comment.

60 Questions? Achaessa James, CEP National Center for Employee Ownership 1629 Telegraph Ave., Suite 200 Oakland, CA