New SEC Staff Guidance Addresses Equity Awards’ Disclosure

Written by Ed Hauder on March 3, 2010 - 0 Comments

On March 1, 2010, the SEC Staff again updated the Regulation S-K Compliance & Disclosure Interpretations (C&DIs).

If a company chooses to report the grant date fair value assumptions for equity awards in relation to the Grants of Plan-Based Awards Table, it can satisfy the Summary Compensation Table disclosure requirements for such information by referencing the Grants of Plan-Based Awards Table. See Question 119.16

The guidance addresses how to report the exercise of a “reload” stock option. Basically, any additional options received must be reported as an option grant in the Grants of Plan-Based Awards Table. Also, the grant date fair value of the stock options granted gets included in the Summary Compensation Table, as a Company would for any other stock option grant. See Section 220.01

The most significant new C&DI that was added was Question 119.24, which addresses the proxy reporting for equity incentive plan awards that have multi-year performance periods, and where the Compensation Committee retains the right to exercise negative discretion in accordance with Internal Revenue Code Section 162(m) to reduce the amount of the award ultimately earned. In particular, this C&DI addresses such awards when the accounting rules (FASB ASC Topic 718 to be precise) indicate that the grant date won’t occur until the end of the performance period after the Committee has made its determination with respect to the awards earned, i.e., after the exercise of its negative discretion. The rules on that are a bit technical, but suffice it to say, it can happen. In such a case, an employee could start providing service counted towards the earn before then (and most likely would do so). The date at which the employee starts providing such service is called the “service inception date” under the accounting rules.

For purposes of the proxy disclosure of such an award, the SEC staff indicated that a company would include the award for the year in which the service inception date occurs. The grant date fair value would be included in the Summary Compensation Table and Grants of Plan-Based Awards Table based on the the probable outcome of the performance conditions as of the service inception date. This amount also would be used in determining whether an executive officer is a named executive officer for the year in which the service inception date occurs.

Here’s the full guidance on this:

Question: In 2010, a company grants an executive officer an equity incentive plan award with a three-year performance period that begins in 2010. The equity incentive plan allows the compensation committee to exercise its discretion to reduce the amount earned pursuant to the award, consistent with Section 162(m) of the Internal Revenue Code. Under FASB ASC Topic 718, the fact that the compensation committee has the right to exercise “negative” discretion may cause, in certain circumstances, the grant date of the award to be deferred until the end of the three-year performance period, after the compensation committee has determined whether to exercise its negative discretion. If so, when and how should this award be reported in the Summary Compensation Table and Grants of Plan-Based Awards Table? In what year should this award be included in total compensation for purposes of determining if the executive officer is a named executive officer?

Answer: Use of grant date fair value reporting in Item 402 generally assumes that, as stated in FASB ASC Topic 718, “[t]he service inception date usually is the grant date.” The service inception date may precede the grant date, however, if the equity incentive plan award is authorized but service begins before a mutual understanding of the key terms and conditions is reached. In a situation in which the compensation committee’s right to exercise “negative” discretion may preclude, in certain circumstances, a grant date for the award during the year in which the compensation committee communicated the terms of the award and performance targets to the executive officer and in which the service inception date begins, the award should be reported in the Summary Compensation Table and Grants of Plan-Based Awards Table as compensation for the year in which the service inception date begins. Notwithstanding the accounting treatment for the award, reporting the award in this manner better reflects the compensation committee’s decisions with respect to the award. The amount reported in both tables should be the fair value of the award at the service inception date, based upon the then-probable outcome of the performance conditions. This same amount should be included in total compensation for purposes of determining whether the executive officer is a named executive officer for the year in which the service inception date occurs. [Mar. 1, 2010]

Finally, due to the February 28, 2010 effective date for the revised proxy disclosure rules, the revised C&DIs withdraw a number of interpretations which are no longer needed. The following questions have been withdrawn: