What disclosures should be presented?

Statement 123(R) sets forth four objectives of disclosure, and specifies the minimum disclosures necessary to achieve those objectives. The objectives are to enable the readers of the financial statements to understand (1) the nature and general terms of the arrangements in existence and the potential effects on the shareholders, (2) the compensation expense reported in income, (3) the methods used to estimate fair value, and (4) the cash flow effects. The minimum disclosures are as follows:

1. A description of the arrangements in existence-general terms, required employee service periods and other vesting conditions, maximum contractual term, and number of authorized shares.
2. For the most recent year, a rollforward of the share and option awards outstanding from the beginning of the year to the end of the year showing the activity (new grants, exercises, forfeitures, and expirations), with supplemental disclosure of how many options outstanding at the end of the year are currently exercisable. The rollforward should present weighted-average exercise prices for options and weighted-average grant-date fair values for shares.
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3. or each year for which an income statement is presented, the weighted-average grant date fair values of awards granted (or calculated value for private companies electing that alternative or intrinsic value, as applicable) and the total intrinsic value of options exercised, share-based liabilities paid, and the total fair value of shares vested during the year.
4. For stock options that are vested at the latest balance sheet date or expected to vest, the number, weighted-average exercise price, aggregate intrinsic value, and weighted average remaining contractual term, with separate disclosure of total options and vested options.
5. The preceding disclosures should be presented separately for different types of awards, for example, options with fixed versus indexed exercise prices, options with only service conditions versus options with performance conditions, or awards classified as liabilities versus equity.
6. For each year for which an income statement is presented, a description of the method used to estimate fair value¹⁷ (or calculated value), a description of the significant assumptions used (expected term, expected volatility, expected dividends, risk-free rates, and discounts for post-vesting restrictions), total compensation cost included in income, total related income tax effect included in income, total compensation cost capitalized in the cost of assets, and a description of significant modifications.
7. As of the latest balance sheet date, total compensation cost to be recorded in future years related to nonvested awards and the weighted-average period over which it will be recorded.
8. The amount of cash received from exercise of share options, the excess tax benefit recorded in APIC, and the amount of cash used to settle equity grants during the annual period.
9. The company's policy for obtaining shares to be issued upon exercise of options and, if the policy is to purchase treasury shares for this purpose, the estimated number of shares to be repurchased in the next year.

The FASB has both added and deleted disclosures and has modified some of the continuing disclosures. The major changes include:

Deletions
• Going forward, there is no need for pro forma disclosure of earnings and EPS under the fair value method, because substantially all employers will be applying the fair value method in their income statements. The pro forma disclosures for prior years presented for comparative purposes will continue to be required (except for private companies that used minimum value for pro forma disclosures).
• The rollforwards (disclosure 2 above) are required only for the most recent year instead of all years for which an income statement is presented. In addition, it is no longer necessary to disclose the range of exercise prices for options outstanding at the latest balance sheet date.
• The weighted-average grant-date fair values (disclosure 3 above) no longer need to be disclosed separately for options that are in the money, at the money, or out of the money at grant date¹⁹.

Additions

• Disclosures 4, 7, 8, and 9 above are new requirements.
• The disclosure of the total intrinsic value of options exercised or shares vested (last part of disclosure 3) is a new requirement.
• In disclosure 6, the disclosures of the method used to estimate fair value or calculated value, related income tax effect included in income, and cost capitalized in the cost of assets are new requirements.

As a reminder, SAB 107 indicates that the SEC staff expects robust disclosures within Management's Discussion & Analysis (MD&A) regarding the impact of Statement 123(R) due to potential significant differences between pre- and post-adoption income statements and cash flow statements that may make the financial statements noncomparable. These disclosures also should include discussion about changes in the nature or quantity of awards and the impact those changes will have on future compensation expense.

Disclosures in quarterly financial statements

SEC regulations presume that a reader of a Form 10-Q has access to a copy of the most recent Form 10-K, so it is unnecessary to repeat disclosures from the latest Form 10-K in the subsequent year's Form 10-Q. For companies adopting Statement 123(R) in the first quarter of the fiscal year beginning after June 15, 2005, the latest Form 10-K does not contain the incremental Statement 123(R) disclosures. Therefore, registrants should include the incremental Statement 123(R) disclosures in each Form 10-Q in the first year of adoption. In some cases, the incremental Statement 123(R) disclosures will be more understandable in conjunction with some of the carryover disclosures, so companies may choose to present more than the minimum requirements in the Form 10-Q for readability.

Note: Non-GAAP financial measures and classification of share-based payment on the income statement:

SAB 107 reminds registrants that share-based payments are compensation and should be treated as such in the income statement. If a company wants to highlight the fact that reported compensation expense includes a non-cash component for share-based payment arrangements, they may do so parenthetically within a caption in the income statement or within the notes to the financial statements or by discussion in MD&A. Presenting the expense for share-based payments on a line separate from other compensation, as though it is something other than compensation, is not appropriate.

If within MD&A, a company chooses to discuss earnings before the compensation charge for share-based payment awards, this is considered a non-GAAP measure. The company should comply with the SEC's rules about non-GAAP measures and ensure appropriate disclosure as to why the company believes this is a useful measure, reconcile to the most comparable GAAP measure, and make relevant explanations of the measurement.

SAB 107 also highlights disclosures that the SEC staff would expect MD&A to include with regard to share-based payment arrangements:

• accounting method used prior to and upon transition and the impact on earnings and cash flows;
• modifications prior to adoption of Statement 123(R) (e.g., acceleration of vesting);
• differences in valuation approaches from Statement 123;
• changes in type of share-based plans (e.g., shift from share options to restricted shares) or terms;
• cumulative effect recorded at adoption; and
• total compensation cost related to nonvested awards and the weighted-average period over which it will be recognized.

Continue Reading - Effective date and transition considerations

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