Defeat Disturbing and Dastardly Disclosures! Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Kevin Hassan, CPA, PwC Important Information The following discussion and examples do not necessarily represent the official views of Stock & Option Solutions, Inc., or PwC, with respect to any of the issues addressed. Moreover, this presentation and the views expressed by the individual presenters should not be relied on as legal, accounting, auditing, or tax advice. The outcome of any individual situation depends on the specific facts and circumstances in which the issue arises and on the interpretation of the relevant literature in effect at the time. Anyone viewing this presentation should not act upon this information without seeking professional counsel and/or input from their advisors. 2 www.sos-team.com 1
Materials Slides http://www.sos-team.com/pdfs/dastardly_disclosures.pdf 3 Agenda ASC 718 Disclosure Requirements Common Disclosure Mistakes Calculating Common Disclosures Auditing Disclosure Calculations 4 www.sos-team.com 2
Required Disclosures Topic 718-10-50-2 (formerly paragraph 240) Outlined Topic 718-10-50-3 (formerly paragraph 241) Example charts 5 Disclosures Summarized Item Minimum Disclosure Requirement Applies To 50-2(a) Description of share-based payment arrangements All 50-2(b) Method used for measuring compensation cost from sharebased payment arrangements with employees. All 6 www.sos-team.com 3
Description + Method of Measuring 7 Item Minimum Disclosure Requirement Applies To 50-2 (c)(1) 50-2 (c)(2) Most recent year: Number and weighted-average exercise prices for share options (or share units) i)outstanding at beginning of year, ii)outstanding at end of year, iii)exercisable at the end of year iv)during the year.01 granted,.02 exercised,.03 forfeited.04 expired Most recent year: Number and weighted-average grant-date fair value for shares not specified in (c)(1) 1 i) Nonvested (i.e. outstanding) at beginning of year, ii) nonvested (i.e. outstanding) at end of year iii) during the year 01. granted, 02. vested, 03. forfeited Options RSUs Stock Purchase RSAs 1 Text removed as part of codification: (for example, shares of nonvested stock) 8 www.sos-team.com 4
Definitions Item Share Unit Nonvested shares Definition A contract under which the holder has the right to convert each unit into a specified number of shares of the issuing entity. Glossary: Shares that an entity has not yet issued because the agreed-upon consideration, such as employee such as employee services, has not yet been received. Nonvested shares cannot be sold. The restriction on sale of nonvested shares is due to the forfeitability of the shares if specified events occur (or do not occur). 718-10-30-18: Nonvested shares granted to employees usually are referred to as restricted shares, but this Statement reserves that term for fully vested and outstanding shares whose sale is contractually or governmentally prohibited for a specified period of time. 9 Disclosures Summarized Item Minimum Disclosure Requirement Applies To 50-2(d)(1) For each year for which income statement provided: Weighted-average grant-date fair value for equity options or other equity instruments granted during the year Options 50-2(d)(2) 50-2(e) For each year for which income statement provided: Total intrinsic value of options exercised (or share units converted), share-based liabilities paid and the total fair value of those vested during the Year For fully vested share options (or share units) and share options expected to vest at the date of the latest statement of financial position, both of the following: 1. The number, weighted-average exercise price, aggregate intrinsic value, and weighted-average remaining contractual term of options outstanding 2. The number, weighted-average exercise price, aggregate intrinsic value, and weighted-average remaining 10 contractual term of options currently exercisable Options www.sos-team.com 5
Examples from the Standard - Options 11 Required Disclosures - Options 12 www.sos-team.com 6
Examples from the Standard RSAs (and RSUs) 13 Required Disclosures - RSUs 14 www.sos-team.com 7
Not Required to Disclose http://www.sec.gov/archives/edgar/data/67887/000006788715000081/fy201510-kdocument.htm 15 Not Required to Disclose Vesting/Forfeited Stock OPTIONs Grant-date Fair Value 16 www.sos-team.com 8
Not Required to Disclose Vesting/Forfeited Stock OPTIONs Grant-date Fair Value 17 Disclosures Summarized Item Minimum Disclosure Requirement Applies To 50-2(f) 50-2(g) Description of 1) method and 2) significant assumptions used to estimate fair value Provide information in paragraphs 50-2(a) (e) separately for different types of awards 18 www.sos-team.com 9
Examples from the Standard - Assumptions 19 Examples 20 www.sos-team.com 10
Disclosures Summarized Item Minimum Disclosure Requirement Applies To 50-2(h) 50-2(h)(1) 50-2(h)(2) Total compensation cost related to nonvested awards not yet recognized and the weighted-average period over which it is expected to be recognized Total compensation cost for share-based payment arrangements a) recognized in income as well as the total recognized tax benefit related thereto and b) the total incremental compensation cost capitalized as part of the cost of asset Description of significant modifications, number of employees affected and total incremental compensation cost resulting from modifications Options RSUs RSAs Stock Purchase Options RSUs RSAs Stock Purchase Options RSUs RSAs 21 Example from the Standard On December 31, 20Y1, the Entity has two sharebased compensation plans, which are described below. The compensation cost that has been charged against income for those plans was $29.4 million, $28.7 million, and $23.3 million for 20Y1, 20Y0, and 20X9, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $10.3 million, $10.1 million, and $8.2 million for 20Y1, 20Y0, and 20X9, respectively. Compensation cost capitalized as part of inventory and fixed assets for 20Y1, 20Y0, and 20X9 was $0.5 million, $0.2 million, and $0.4 million, respectively. 22 www.sos-team.com 11
Example As of March 31, 2011, our total unrecognized compensation cost related to stock options was $36 million and is expected to be recognized over a weighted-average service period of 1.5 years. As of March 31, 2011, our total unrecognized compensation cost related to restricted stock, restricted stock units and notes payable in shares of common stock (collectively referred to as restricted stock rights ) was $255 million and is expected to be recognized over a weighted-average service period of 1.9 years. Of the $255 million of unrecognized compensation cost noted above, $24 million relates to performance-based restricted stock units for which we ceased recognizing stock-based compensation expense during fiscal year 2010 because we determined that the performance attainment was neither probable nor improbable of achievement. 23 Disclosures Summarized Item Minimum Disclosure Requirement Applies To 50-2(i) 50-2(j) 50-2(k) Amount of cash received from exercise of options and shares granted under share-based payment arrangements and the tax benefit realized from exercises Amount of cash used to settle equity instruments granted under share-based payment arrangements Description of entity s policy for issuing shares upon exercise Options SARs SARs 24 www.sos-team.com 12
Unnecesary Disclosures Some companies still disclose the information below. While this was required in the past, it has not been required since the adoption of FAS 123R/ASC 718. 25 Unusual Disclosures Modifications 50-2(g)(2) Description of significant modifications, number of employees affected and total incremental compensation cost resulting from modifications During fiscal 2010 a modification to our Purchase Plan went into effect that increased both the maximum employee contribution and the limit on the number of shares that could be purchased. As a result, a number of our employees chose to increase their contribution percentage which was accounted for as a modification to the terms of the award and resulted in $306,000 of additional compensation cost during the fiscal year. On June 30, 2006, a purchase date under our ESPP, our closing stock price was lower than the stock price at the beginning of the respective purchase period. As a result, in accordance with the terms of the Plan, 40 participants were withdrawn from the then-effective offering period and reenrolled into a new twenty-four-month offering period beginning July 1, 2006. Incremental compensation cost of approximately $98,000 associated with this modification is being recognized during the respective new offering period. 26 www.sos-team.com 13
Unusual Disclosures Modifications 50-2(g)(2) Description of significant modifications, number of employees affected and total incremental compensation cost resulting from modifications Effective, May 31, 2007, we modified our ESPP such that the length of all offering periods, beginning June 1, 2007, is six months. Consequently, there is no reset feature associated with these new six-month offering periods. As a result of the modification to the ESPP, the December 1, 2006, offering period, ending November 30, 2008, was the final twenty-four-month offering. On November 30, 2007, this offering was reset to a six-month offering period beginning on December 1, 2007. Therefore, the unrecognized compensation cost at December 1, 2007, will be recognized over a six-month period ending on May 31, 2008, instead of the remaining twelve months of the original offering period. There will be additional participants in the six-month offering beginning June 1, 2008. The additional participation is attributable to the reenrollment of those individuals who were included in the final twenty-four month offering. As a result, we anticipate that stock-based compensation could increase in excess of $500,000 in fiscal year 2008. 27 Disclosure Mistakes Not including ESPP Including unnecessary disclosures Price table Wtd average fair value for options vested, forfeited, etc. Not separating RSUs from PSUs Not including non-employees Defining nonvested as unvested options 28 www.sos-team.com 14
Calculating Common Disclosures Weighted-average grant-date fair value for RSUs Beginning Outstanding Sum(Outstanding as of Beginning of period * Fair Value per Share)/ sum (outstanding at beginning of period) Granted Sum(Granted * Fair Value per Share)/ sum (Granted) Vested Report with each vest date + shares in each tranche Vest Date >= Period Begin AND Vest Date <= Period Begin AND() function Sum(Vested * Fair Value) / Sum Vested Forfeited NOT the same as cancelled Cancelled BEFORE vesting Ending Outstanding See beginning 29 Calculating Common Disclosures 30 www.sos-team.com 15
Auditing Disclosure Calculations Vested & Expected to Vest Vested + Unvested * (1-Forfeiture Rate)^ Remaining Service Period Many systems use more complicated algorithms that cannot be recreated for a full report However this simple approximation usually produces results close enough to get the auditors comfortable Straight-line: Remaining Service Period = (Final Vest Date End of Period) / 365.25 Yearfrac() 31 Contact Information Elizabeth Dodge, CEP Bus: 408.385.8786 E-mail: edodge@sos-team.com www.sos-team.com Kevin Hassan, CPA Bus: (203) 539-4049 E-mail: kevin.hassan@us.pwc.com www.pwc.com 32 www.sos-team.com 16