SEC Staff Provides Accounting Guidance on Certain Types of Compensation Awards
Summary
The SEC’s Office of the Chief Accountant and the Division of Corporation Finance announced the issuance of Staff Accounting Bulletin (“SAB”) No. 120, which includes accounting and disclosure guidance for certain types of compensation awards for executives called “spring-loaded awards.”
Background
Share-based compensation awards that are granted shortly before a company releases market-moving information are called “spring-loaded awards.” Prior to the issuance of SAB 120, there was limited guidance on the treatment of material non-public information in determining the valuation of spring-loaded awards.
Main Provisions
The staff provided interpretive guidance for public companies to consider when issuing spring-loaded awards. The interpretive guidance expresses views of the staff and provides supporting examples. Key highlights of the new staff guidance include:
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Although material information related to a particular transaction or event may not have been publicly released, the staff believes that the economics of the transaction or event should be reflected in the valuation of spring-loaded awards. As such, a company may be required to adjust its expected volatility if the information would be considered by a participant in the marketplace.
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When there is material information that has not yet been released but is planned for or anticipated to be released after the grant of spring-loaded awards, a company should consider whether an adjustment to the observable market price of the share is necessary. This will require significant judgment, particularly in circumstances when the release of material information is expected to increase the market price of the shares (which would indicate that marketplace participants would have considered an adjustment to the original market price of the shares).
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Extra scrutiny should be applied to non-routine grants of spring-loaded awards. In these situations, the determination of both the volatility and underlying share price assumptions used to value the spring-loaded awards may require significant judgment.
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Stock compensation guidance[1] requires companies to provide disclosures that allow users of financial statements to understand the nature and agreement terms of awards. For spring-loaded awards, a company should disclose its accounting policy on how the underlying price of shares and volatility as well as other inputs required to estimate the fair value on the grant date were determined. Additional information such as how the adjustments to the underlying stock price or volatility were derived and any other significant assumptions should be disclosed as well.
SAB 120 also rescinds portions and conforms portions of existing SAB guidance in order to align with recent changes to ASC 718 issued by the FASB, primarily Accounting Standards Updates 2016-09, 2018-07, and 2019-08.
[1] FASB ASC 718, Compensation—Stock Compensation, specifically paragraph 718-10-50-1
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