New SEC Accounting Guidance on Valuation of Spring-Loaded Equity Compensation Awards
By Stafford Schmidt, Rebecca Jordan, Austin T. Kim
On November 29th, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 120 (“SAB 120”) regarding the valuation of “spring-loaded” awards to executives. SAB 120 updates previous SEC staff guidance under Topic 14: Share-Based Payments that are accounted for under Accounting Standards Codification Topic 718 - Stock Compensation (“Topic 718”). Spring-loaded refers to a type of share-based transaction made by a public company in possession of material positive information that has not yet been disclosed to the broader market. Examples could include pre-released earnings reports, pending acquisition and divestiture transactions, or stock buybacks. The SEC staff has become concerned about the increase in non-routine spring-loaded grants that effectively undervalue the fair value of the awards. Topic 718 requires companies to record share-based transactions at their grant date fair value, using valuation assumptions relevant to the award. As noted in SAB 120, the staff believes companies need also consider relevant material nonpublic information’s impact on valuation inputs, most notably the current price of the underlying share, expected volatility and expected term.
Example applications of SAB 120 include:
- A company should adjust the underlying share price of an award when the market price does not reflect certain material nonpublic information known to the company but unavailable to marketplace participants at the time the market price is observed
- A company may not exclusively rely on implied volatility if material nonpublic information exists
In conclusion, SEC staff is alerting companies that spring-loaded awards will be under increased scrutiny if it is determined that the fair value calculation did not consider all relevant known information. Additionally, the staff would expect companies to disclose its accounting policies for adjustments made to valuation inputs. SAB 120 is reminding companies “of their corporate governance obligations and disclosure obligations under U.S. GAAP with respect to share-based payment transactions, as well as the need to maintain effective internal control over financials reporting.”
Stafford Schmidt is a CPA and has years of experience in this capacity. He currently provides consulting services in various areas of compensation matters, specializing in director compensation, executive compensation trends, peer group development, and annual and long-term incentive program design.
Becca Jordan works with both large publicly traded clients and smaller privately held companies across a wide range of industries. She provides consulting services in various areas of compensation matters, specializing in director compensation benchmarking, executive compensation trends, and peer group analysis.
Austin T. Kim
Austin Kim works with both large public and smaller private clients across a wide spectrum of industries. He has experience in providing various consulting services in the compensation sector, specializing in peer group development, executive compensation trends, director compensation benchmarking, annual incentive program design, and long-term equity crossover analysis.