By Nicole Dmitruchina. Equity compensation is an essential tool for attracting and retaining top talent and motivating employees to think like shareholders and share in the long-term value they help create. Unfortunately, the accounting and reporting requirements of these programs can also make for an intensive reporting burden. Read on for a few best practices to minimize the financial reporting hurdles of share-based compensation.
A key first step is understanding of accounting implications prior to award roll-out. Equity awards are becoming increasingly complex, resulting in complicated calculations and interrelated metrics, not to mention changing market conditions. As an added bonus, different participants likely have different criteria and vesting schedules, further adding to the convoluted reporting considerations. Involve all stakeholders early in the process and run a few scenarios to test the impact and outcomes. Make the accounting treatment a part of the plan design, rather than an afterthought. When this is not possible, as we are often handed awards that are already rolled out, be sure to proactively run through accounting procedures prior to any crunch time.
Tight deadlines have always been part of the financial reporting process, but you can make your process more efficient. Especially in a changing disclosure environment, where standards continue to be more heavily regulated, building in a few process efficiencies along the way rather than saving it all to quarter close, can save a tremendous amount of pain. A few time saving tips include auditing your data at each month-end and ensuring you have a comprehensive understanding of your calculations and methodologies before your auditors come in.
As with virtually all areas of financial reporting, it’s essential that your company has a well-defined set of documented, repeatable controls to govern the equity-comp program. In order to minimize risk, you should implement key procedures with your IT, Finance, Legal and HR departments, such as gathering and sharing tax and payroll data. You can find a more detailed list of key factors to consider for well-structured controls here.
Have you ever heard the saying, “You don’t know what you don’t know”? Be proactive and stay on top of rules, regulations and requirements for financial compliance. Legislation, FASB interpretation/opinion and administrative law are all ever-changing, and failing to stay up to date can have serious consequences. Stay in close contact with your auditors throughout the year to stay abreast of any critical changes. Particular accounting hazards include rounding for share withholding, true-ups and forfeitures, modifications.
By considering accounting implications from the beginning, auditing your data along the way, documenting some key processes and staying up to date on the changing regulatory landscape, you can stay ahead of the curve. For more information on financial reporting challenges, be sure to download Certent’s Four Fundamentals of Financial Reporting for Equity Compensation. Have an idea to improve financial reporting not mentioned in this article? Post a comment and share your experience!