Thursday, January 18, 2018

Win the quarterly review and annual audit game! Our expert panelists will help you create an audit playbook, including tips for gathering valuation assumption support and documenting various decisions and actions, as well as many other proven strategies.  Listen as they share lessons learned from ASU 2016-09, and best practice tips on process documentation and internal controls considerations for calculations under ASC 718.
 
Featured panelists:

• Raul Fajardo, CEP, Certent
• Kevin Hassan, CPA, PricewaterhouseCoopers
• Bill Storey, CPA, CEP, Stock & Option Solutions

Index
Introductions and Agenda
Assembling the Roster…Who Should Be Involved?
The Playbook
Preparing Stock Comp for the Auditors
ASC 718 Valuation Best Practice Tips
FASB ASU 2016-09 Implementation
Next Wave of Accounting Changes
 
 Kathleen Cleary, Education Director, NASPP:  Good afternoon, everyone.  Welcome to today’s webcast, “Financial Reporting and Accounting Playbook—Winning Plays from the Pros.”  Today, our panelists will share lessons learned from ASU 2016-09 and best practice tips on process documentation and internal control considerations for calculations under ASC 718.
 
First, introductions.  My name is Kathleen Cleary and I'm the Education Director for the NASPP.  I'm happy to welcome our esteemed panel of experts today: Raul Fajardo, CEP from Certent, Kevin Hassan, CPA, from PricewaterhouseCoopers and Bill Storey, CPA and CEP from Stock & Option Solutions.
 
The slide presentation for the webcast is posted on NASPP.com, and you can download or print it, whatever works best for you.  It’s also loaded as a handout in the GoToWebinar panel and you can also pull it from there.
 
You will have an opportunity to ask questions throughout the webcast using your GoToWebinar panel, so please feel free to type your questions in and we will address them as they come in, time permitting.  If for any reason we’re unable to address your questions as we’re going along, then I’ll follow up afterwards by email.  Or feel free to email me as well.
 
We’ll post an archive of today’s program within the next couple of days, and then a transcript will be posted in just a few weeks.
 
OK, let’s go ahead dive into the materials.  I am going to turn it over to Bill Storey to get us started.  Bill?
 
Return to Index

Introductions and Agenda

 
Bill Storey, CPA and CEP, Stock & Option Solutions: Thank you, Kathleen.  Hello everybody, I’m Bill Storey, Senior Manager of Financial Reporting and Accounting Services at Stock & Option Solutions, or SOS.  For those of you who have not heard of SOS, we are an equity compensation consulting firm.  We help public and private companies with the administration of their equity incentive plans and their employee stock purchase plans.  We help companies navigate financial reporting and accounting challenges, as well as provide project resources, temporary and permanent staffing.  Kevin?
 
Kevin Hassan, CPA, PricewaterhouseCoopers:  Thanks Bill, hello everyone.  My name is Kevin Hassan and I'm a Managing Director at PwC.  I'm based in Stamford, Connecticut and I work on benefits, compensation and accounting questions in a group of people who do that.  Any questions, any concerns, comments, please feel free to leave a message and you’ve got my email here.  Raul?
 
Raul Fajardo, CEP from Certent:  Thanks Kevin, hi everyone.  This is Raul Fajardo of Certent.  I’m the Customer Support Manager at Certent, and I help our clients navigate through financial reporting and equity compensation administration difficulties.  Bill, back to you.
 
Storey:  All right, moving to our disclaimer slide.  As you probably know, the information that you're about to experience from Raul, Kevin and myself is purely our opinion.  Please do not act on anything we say without consulting your professional advisors.
 
As for the agenda, we are going to talk about what things can be done to assemble the appropriate roster of key players who will be tasked with stock compensation.
 
We’re also going to discuss the playbook, which is your binder of plays, secrets, tips, whatever you want to call it, that will help you execute the strategies you need to ensure that your stock comp is in good shape both for your internal management team, as well as for your auditors, your participants, the government, and if you have any other reporting obligations, anyone else who needs it.
 
We’ll touch on some ASC 718 best practice tips, primarily focused on valuations.  For those of you who experienced the adoption of ASU 2016-09, we are going to touch briefly on some of the lessons that were learned, as well as make a quick note on IRS Notice 1036 that just came out earlier this month.  Then we’ll wrap it up with the next wave of accounting changes and any Q&A.
 
Listed here are some of the questions we’re going to try and answer.  If you have a question, please submit it and we’ll do our best to get to your questions as we go through the materials.  If we can't get to your question, we will definitely follow up with you.
 
But here are some of the key questions.  Who is involved in stock compensation administration?  Who are some of the key players?  What are some sample processes, checklists and internal controls?  Given that we’re doing this right now in the middle of January, a lot of the 12/31 year-end companies are probably going through this as we speak, if they haven’t completed it already.  If you’ve already completed the process, this can probably be a quick refresher, or confirm some of the things you already know.
 
What are some things you should be doing before the auditors arrive if they haven’t arrived already?  And we’re also going to touch on some things you should be doing while they're on site.
 
As I mentioned, Kevin is going to cover best practice tips for ASC 718 valuation.  We’re going to touch on the lessons learned from the adoption of ASU 2016-09, then some of the accounting changes that are coming.  There’s one in particular that I'm very excited about, and we’re going to give you a quick update on that.
 
Before we get any further, we just want you to know that this is going to be an engaging webcast.  Unfortunately, we can't see you in person, but there will be some polling questions.  And here’s our first polling question, Kathleen?
 
Cleary:  All right, the first polling question is, “What area do you specialize or work in at your company or organization?  Are you in legal, HR, payroll, comp and benefits, finance, accounting, financial reporting and tax, treasury, investor relations, FP&A, or other, which might include a consultant, an auditor, a database provider, or none of the above?  Go ahead and make your selection, and I’ll put up the responses for everyone to see in a minute.
 
Storey:  OK, we’ll give them a few minutes.
 
Cleary:  All right, let’s take a look at the responses, and you can see that the majority of our listeners are in finance, accounting, financial reporting or tax.
 
And a close second is HR.  These results pretty much agree with most of our members that I’ve spoken with.  Now you know who’s listening with you.  Let’s move on, Bill.
 
Return to Index

Assembling the Roster…Who Should Be Involved?

 
Storey:  Awesome, on the next slide, you will see a matrix of key players.  This is your stock comp fantasy team here, and as you can see, stock compensation touches a lot of different areas, both inside, as well as outside the company, whether you're private or publicly traded.
 
Given the roles and your company size, it’s very possible that some of you on the webcast today may be wearing multiple hats.  You may be wearing the police hat in the lower right-hand corner to ensure compliance with all the necessary rules, laws, or regulations.  You may be wearing that Uncle Sam hat on the lower left because you’ve got to report tax information to the participant, as well as the government.  Some of you might be wearing the Santa Claus hat, as an opportunity to provide your participants and their families with a vacation, a new car, a new house, or paying down debt with some of the equity that they’ve earned.
 
Last, but not least, you’ve got the magician hat, the top hat, and the joker hat, that’s for some of you serious folks who are responsible for coming up with these equity plans, getting it through all the legal, accounting and tax hurdles, and then those of us who are responsible for executing those plans, and also accounting for them.
 
Raul or Kevin, anything you just want to add here?
 
Hassan:  Yes, I just wanted to add, when 123R came out in 2006, you would not have seen the chart like this.  It was very siloed, very focused in one area.  Now, because of all the concerns and everything that Bill just mentioned, there is a much broader group of players in this space.
 
I think the critical thing here is that the more players, the more involvement, the better off you're going to be in terms of being prepared at any point in time.
 
Storey:  Awesome.  Raul, anything you want to add? 
 
Fajardo:  Yes, I totally agree with that.  The other thing is that when there are a lot of players involved, there also has to be a lot of communication involved.  You may not be aware of it, but some things you do have a downstream effect on others and it’s important that people communicate with each other.  Then, if there are things that people downstream need, it’s pretty clear what they need from you and the reasons why you're doing it, so that you're able to do your part.  In the end, this is like one big matrix and what you're doing could affect others.
 
Storey:  Exactly.  Stock comp requires specialized expertise and you'll want to ensure that you have it in each one of these areas.  If you only work in one of those areas, that’s perfectly OK.  At least have an overall understanding in each of the other areas or ensure that someone on your team can help coordinate all of this and be the person in the middle who is either a certified equity professional or a very experienced stock comp consultant.
 
As Raul mentioned, the one thing in common that will help all of these work is communication.  It is the key thing that every team has to have, and it’s the glue that brings all the pieces together.
 
Kevin mentioned it earlier, you really can't work in siloes.  You have to be open and communicate.  Some of this information is indeed confidential—everyone knows that and must maintain confidentiality.
 
In order to have an effective stock comp process and an effective stock comp team, it is critical that you communicate with each other and remember you’re all on the same team.
 
As it relates to the stock comp framework—again some of this stuff is very familiar to what some of you are going through right now—but these are the four areas that typically comprise the control infrastructure, which is where all of your internal controls probably reside in each of these phases.  You have the grant phase, which starts at the board level, where legal is responsible for getting all the legal stuff done.
 
The awards get approved and then that information gets sent over to the HR or the stock plan admin team.  They do some of the day to day activities; communicating to the participant, making sure the plans are compliant and ensuring all the tax information gets done.  Most importantly, ensuring that the participant is indeed happy and that they are taking advantage of a pretty awesome benefit the company is providing.
 
Then you have the calculation phase.  This is where all of you finance and tax people reside.  Someone has got to account for all this and be able to report numbers, internally or externally.  Some of the valuations have to be done, which Kevin will talk about later. 
 
The final stage—which is the reporting phase, and my favorite—someone has to report this stuff to management, the government, or to the participant.  Or possibly all of those.  Every company, whether you're publicly traded or private, has some sort of a reporting obligation and you will want the disclosures to be as complete and accurate as possible. 
 
That’s it for the brief introduction on the roster and the framework.  Now I'm going to turn it over to Raul to discuss the playbook.
 
Return to Index

The Playbook

 
Fajardo:  Thank you Bill.  I’d like to go through a common checklist introduced in the stock comp world.  First and foremost, the grant and award.  That’s where it all starts, right?  Participants were given a grant or an award and there’s a checklist of what needs to be done.
 
We actually have a more detailed list in the appendix.  I won't go through that in this presentation, but if you want to see some of the key areas you need to be aware of when you're doing grants and awards, please go ahead and check the appendix.
 
The other main area to develop a checklist for is stock compensation expense.  That’s probably the first thing that occurs after an award is granted.  Each award or grant will have expense and you have to book that properly.  There are some dos and don’ts, and we’ll go through those on an upcoming slide.
 
The other things we want to make sure we’re doing correctly—and therefore we also want to have a checklist on—are other things we’ll be reporting on, such as earnings per share and deferred tax assets (DTA).  DTA is the one in the limelight right now because of the recently approved Tax Cuts and Jobs Act.  There was a change in the corporate tax rate, so DTA was affected and I think you're going to see a lot of activity and a lot of things you need to do for your audit.  This is going to be an area that people will be spending time looking in to.
 
Also go through a financial statement audit checklist.  You are probably responsible for some of the disclosures on the financial statements when it comes to equity comp.  We have a checklist for that as well.  We don’t have time to go through it, but it’s in the appendix and you can review it at your leisure.
 
The other one is SOX compliance; we’ll go through a few items that you can check and use in your day to day job.
 
Next slide please. 
 
Hassan:  Raul, before we move on, can I just ask a question?  In terms of going back to some of these checklists, do you suggest that they're filled out every time for every grant?  For example, certain companies will do a mega grant once a year and then have periodic new hire grants.  Do you see the checklists done all the time? 
 
Fajardo:  I certainly see it done for the big merit grants.  When it comes to the new hire grants, depending on how often do you do it, if it’s monthly or quarterly, I think you need to show that you are at least going through your checklist.  And certainly, for the significant grants, you want to make sure that you are following your checklist.
 
If it’s a small grant, it probably doesn’t matter as much.  But for the bigger grants, I definitely see people going through their checklists.
 
Hassan:  The other question, getting back to SOX compliance, do you see the checklists being signed off or approved as well?  Is it in the playbook, or is there an overall policy to have these checklists completed?
 
Fajardo:  Yes, definitely. 
 
Storey:  I’ll also add to that.  A lot of the clients I work with, some who are finance folks, are doing multiple checklists.  A checklist is only as good as the person filling it out and if the person knows exactly what to do, they’ll know if something is not on the checklist.
 
As a former auditor, checklists to me were what we call CYA—and I don’t think I have to explain what CYA stands for.  You're more than welcome to Google it.  But you never want a mistake to hit your participant.  You don’t want a mistake to hit your C-suite executives and you definitely don’t want a mistake to hit your board or your auditors.
 
It’s really hard for all of us to try and keep all this stuff in our heads, unless you’ve been doing it for a very long time.  You might be a robot or superstar who can actually memorize all this stuff.  But the checklists are nothing more than simple reminders.  And they can get you out of trouble if there’s a dispute or an error.  You can always go back and troubleshoot where was there a breakdown.
 
Fajardo:  Yes.  And to close the loop on that, I think a lot of these processes are going to have things that you really do on a day to day basis.  As Kevin mentioned, there might be just a merit or focal grant that’s done once a year, and are you really going to remember all of the steps when you're only doing it once a year?  Having a checklist is a good tool to ensure accuracy in what you're doing, and also making sure that you go through all of the necessary steps.
 
OK, now on to the next slide, here’s just some of the stock comp expense “to dos.”  First and foremost, make sure that the expense is calculated accurately.  I always hear, “Well, isn’t that why we have a system, it’s supposed to be calculating that accurately?”  And while the system will make it very easy for you to come up with what the expense is, I think there’s still some responsibility on issuers themselves to make sure that that expense is being calculated accurately.  Double checking, coming up with samples, for example, here’s one grant and I just want to prove out that the expense I'm booking through a system is correct.  So, choosing a sample grant to prove the calculation, that’s probably the first step.
 
After that, make sure you have all of the documentation needed.  One of the things I see auditors asking is for grants that were given out two or three years ago but are still being expensed.  Some auditors will ask for that documentation and you wonder why?  They want to make sure that each grant is actually documented and approved, and that they are still accurately being expensed.  So, don’t be surprised if they ask you to come up with documentation for grants that were given out maybe a couple of years ago.
 
Checking for accuracy and completeness is also very important and always something good to review.  Not only do you have the expense, but if you are booking it into your general ledger, there’s got to be a review and approval.  This might be automatic, but it is key to be able to show the signature and date of the review before booking the expense.
 
And then something that might seem natural to us because it is the next step, make sure that whatever you calculated for expense, ties in to your general ledger.  I see people coming up with their expense report from the system, and then they don’t bother to check what was actually posted in the ledger.  It’s better to make sure that it ties out early in the process, rather having somebody else discover it for you.  Making sure the expense amount ties to the general ledger is an important part of the process.
 
One more thing that is pretty common is comparing your current expense to the prior periods and making sure you provide explanations for any significant variances.
 
If it’s pretty flat, then maybe it’s an easier explanation because there weren’t any big changes that occurred.  If there are any differences, it might be easier to put them into smaller buckets such as new grants in this fiscal period, prior grants that have now completed vesting and any significant modifications.
 
Bill and Kevin, anything to add? 
 
Hassan:  Yes, I was just going to touch on a couple of things.  You talked about confirming to the general ledger, especially in companies where cost may be capitalized versus expense, you need to make sure that it’s separate and not booked in both accounts.
 
Most importantly, and as an auditor and I hear, “Well I have a system, and so it’s got to be right.”  Well, if something was input wrong, the system is only as good as what goes into it.  Again, I would just tell you that I wholeheartedly agree on making sure everything is getting reviewed multiple times, because things could get missed in the scheme of things.  As one who has been on the path of consulting and actually doing audit support on it, one of the first questions you ask is, “Who signed off on it?”  Then you find out nobody did.  It came out of the system, it has to be right.  Then you go back and test the data and the data is wrong.  I’d just like to echo everything Raul said, from our vantage point, is something very important.
 
Storey:  I’ll just add on the flux analysis, a lot of companies look at year over year differences, as well as variance from forecast, or quarter over quarter.  Any way you want to slice and dice the data, if that’s part of your process, just make sure that you're showing evidence as to what you're doing.  And if there are any issues that come up, you're investigating those and resolving them timely.
 
Return to Index

Preparing Stock Comp for the Auditors

 
Fajardo:  Thanks guys.  Our next section is preparing for the auditors, and particularly for stock comp, what you need to do before the auditors arrive.  I think that was mentioned in the agenda.  And then what you do when the auditors arrive.  Let’s ahead and go to the next slide.
 
Some of these will look pretty familiar.  We’re all given a list of schedules that we’re supposed to be preparing.  And while this may be academic, it’s very important that you have all of these before the auditors arrive, not just waiting for the last minute to run the reports.  The earlier you start on working on it, the better it is.  If you have an idea of what will be requested, you can have the correct documentation ready.
 
Something we mentioned earlier, checklists and internal controls are key for providing evidence that there’s been management review and approval.  Not only that, but ensuring that all these approvals are obtained with the proper dates, not after the fact.  You want to really crack down on like rubber stamping—make sure you have a signature so you can show evidence that the reports were reviewed—really reviewed and really approved.  If people internally are asking you tough questions, then in all probability, the auditors are going to ask them too.  You might as well know how to field them now, rather than later. 
 
The other thing is—and Kevin, sorry but this is so true—prepare for the unexpected.  Auditors love that unpredictability and they want to catch you to see if you're prepared to answer a curveball that’s being thrown at you.  Prepare for that, because you might think, “Oh, I'm ready because I already have a list of all the schedules that I'm supposed to prepare.”  Be aware, because they're going to ask you something that you weren’t probably anticipating. 
 
Storey:  If I may jump in here really quick.  When we presented this session at the NASPP conference in DC last October, we got into a bit of a debate, Kevin, on whether auditors love unpredictability.  Along the lines of what Raul said, I just wanted to clarify that there may be a new audit person assigned to the audit engagement, who didn’t ask similar questions last year.  They may be trying to learn something for the first time, whereas you may be thinking as the issuer or the person being audited, “Why do I have to keep explaining the same thing over and over again?”  Just be aware of these things.
 
From a reviewer perspective, I noticed a lot of crackdown on the PCAOB (Public Company Accounting Oversight Board who regulates the audit firms) telling audit firms that they haven’t been doing enough work.  One of the things that came up during our presentation in October was, “What do you do to show that someone reviewed and approved the calculation, besides their signature?”  My response to that was, “What did the person do to get comfortable that the information was complete and accurate?”  The other question was, “Were they competent enough to understand stock compensation?”  If they're not competent enough or if they just checked it off and said it was good, chances are if there’s an error, the auditor will come back and say, “Well you signed off on it.”  It’s going to make someone look bad and show they didn’t do enough due diligence. 
 
Kevin, I just wanted to clarify that unpredictability comment.
 
Hassan:  Well, a couple of things.  I totally agree that what usually happens is that this is an area where people tend to be new every year.  Don’t get frustrated, but I do think one of the things you need to think about here is what you're doing and how you're doing it.
 
I couldn’t agree more, Bill, with what you just said about making sure you know what you're looking at and reviewing—not that you’re just signing something and putting the date down—that you actually did have four eyes look at it, or six eyes, or however many eyes you require.
 
I think the one thing I will tell you is that the more you can get an auditor comfortable at the beginning, the better off you're going to be.  The more they're concerned, the more they're going to keep digging into things, and quite frankly so will any other external or internal people.
 
I think anybody who has an audit function is going to want to be in the position to ensure that you always have your skepticism and then when you get past it, what’s next?
 
Cleary:  I think Raul mentioned DTA analysis—they're in the spotlight right now because of the recent tax reform—so in case anybody missed it, we did a webcast yesterday on the changes to the tax laws.  We delved pretty deeply into DTAs, and also gave a few journal entry examples.  As a matter of fact, I think Kevin told me earlier that was actually his boss who presented yesterday, Ken Stoler from PwC.
 
If you need more information on DTAs and other tax reform, please feel free to listen to the archive of yesterday’s webcast, it’s already posted on the website.
 
Let’s move on, Raul?
 
Fajardo:  Thank you Kathleen.  Going on to the next slide, documentation of controls, and I think it’s pretty important.  A lot of people say, “Yes, I have a documented process.”  But when I ask, “Can you actually show it me and describe what that process is?”  Then they come up with something that was written six years ago and hasn’t been updated.   Having that document is a starting point, but there’s got to be periodic review and updates.  Updated documentation showing that you really have processes is something that’s pretty important.
 
Another thing that will help you is coming up with samples of offer letters and comparing them to board minutes.  Making sure the offer letters that include grants, the award numbers are consistent with the board minutes.  Providing a reconciliation of board minutes to actual shares granted in your system, making sure all the grants are included, and doing some random checking to be sure that those grants were assigned to the proper person.
 
The other thing that’s important is making sure you document communication of grants to participants because it is something that’s required for a complete process.  You might be requiring acceptance of the award and if that’s the case, then you’ll need to be able to show, both internally and externally, that there’s been some follow up done.  Then demonstrate this for your audit team during both interim work and SOX testing. 
 
Some of these things you're doing are not only done at in the year-end process, but also throughout the year when there’s interim work and SOX testing that’s being performed. 
 
Hassan:  Raul, just one thing, when we talk about the communication of grants to participants. one of the critical factors for having a grant date is having a mutual understanding—between the company and the awardee—of the key terms and conditions.  If you can't document that, your auditors are going to push back and ask whether or not the grant date is right.  That’s not one to minimize.  You really do need to make sure you have it documented both from a controls perspective, and actually to support your accounting as well.
 
Storey:  I’ll just add—all this work is necessary.  But do take a vacation.  Life is too short.  Recharge those batteries.  As long as this stuff is fairly well documented, your team can take over or cover for you while you're gone.  So please take some time, spend some time with your family and friends.  This stuff shouldn’t pile up while you're gone. 
 
Fajardo:  I agree with that.  And I think that’s just one more reason to have a well-documented process—then somebody can actually take over on certain parts of this process.
 
OK, one more thing to be audit-ready.  What are some of the things you need to watch out for, specifically? Things like transactional data?  What are those issues?
 
Termination errors or delays are pretty common and what happens is that somebody is supposed to be terminated, let’s say at the end of November, but you don’t get that information until the end of December.  It’s possible there could be shares someone was not entitled to and they're able to exercise or receive a release of shares because there are delays or errors in the termination process.
 
Coming up with a documented process to prevent those errors, making sure that whoever the information is coming from—whether HR or whatever group—sends that information over timely so that it’s properly recorded in your stock administration system, that really helps.
 
Grants after termination—at least now while the current employee/non-employee accounting rules are in place—that’s something that you want to prevent.
 
Out of sequence exercises—if there’s something that’s not supposed to vest for two months and then there’s an exercise on that grant—and you're not allowing early exercises, make sure that you don’t have these types of situations.
 
Tax—pretty important—make sure you have the proper tax being collected at the time of an exercise and/or a release.  The supplemental withholding rates have changed, so you need to implement the 2018 effective rates.  Then make sure you update those tax rates as needed so that you can collect the proper amount of tax.
 
This is especially key for transactions that involve the maximum.  And why is that?  Well, the maximum for 2018 has just been reduced.  If you keep withholding at 2017 rates, there might be a possibility that you're running into liability accounting issues because you're withholding at more than the maximum allowable withholding.  You might think, “Why does tax have something to do with this?”  It could act against you—just making sure that you have all these properly set up is key.  Out of sequence uploading of data, that’s something that you want to try to prevent, too.
 
If you are one of those companies that actually suspends vesting during leaves of absence, make sure you're doing that, so that people who might not be entitled to a vesting are not getting those benefits.
 
Mobility tracking, that’s pretty important.  Make sure you have that in place.
 
There are a lot of things to watch out for and you might think, “What does that have to do with my audit?”  But these things could really play into it, just be on the lookout. 
 
Hassan:  Yes, I was just going to say, Raul, I couldn’t agree with you more on the issue of the withholding rates, because I know there’s some concern about people and systems not being able to update quickly enough.  I don’t want to say they're not, I'm just saying that it could be a problem.  You want to make sure that you're not tripping on any of these things and then get really negative accounting consequences.  The other thing that I was going to say, when we were talking about termination error delays, if you want to go to actual forfeitures, that also is something you need to think about both from a control perspective—meaning that you need to think about whether you’ve done that on a timely basis—and that you have the system set up to do what you needed to do to get the information as timely as you can.  Those are two that you brought up and I couldn’t agree with you more.
 
Fajardo:  Thank you.  Bill?
 
Storey:  I’ll just add that at SOS, we see these things happen all the time.  We try to get ahead of the game by having pre-close meetings with clients before the end of the quarter, where we go through each of these red flag items and try to get as much of them done before the rush as we can—just because we’re all busy and everyone is doing a bunch of different things.
 
If you see these issues happening and they're happening frequently, you may want to have a conversation with the person or the team that’s responsible.  Take them out to lunch, buy them some chocolate or something, and just let them know, “Hey, if there’s any way we could get this a little timelier, what can we do to help you with that?”  Usually doing it ahead of time saves you time on the back end, because if it happens during the rush and you’ve got fire drills, it’s really hard to get a lot of stuff done.
 
We preach being proactive as opposed to reactive for some of these things.  Consider the consequences of these things reaching the auditors or your management team.
 
Fajardo:  Yes, if you find something that’s already happening, don’t wait until after the end of the period to start correcting it.  Start doing it already because I’ve seen people wait until the very end and then they're trying to undo things and, in the rush, they miss one or two items that could affect their reporting.  Correcting things as soon as you find out something is wrong will help you in the long run.
 
Next slide, please.  Here are like some of the pretty common documents that auditors are going to ask for.  Copies of stock plans—this is like your bible because it will tell what you are authorized to do and to give your participants—especially any amendments.  If you have additional shares that you got approved or if there’s a new provision.  Let’s say you now added net share withholding to your release methods, your auditors are going to ask for documentation.
 
Board minutes are pretty important, keep compiling them.  One thing I suggest is not to wait until the very end of the year to start collecting these documents, collect them as they happen.  Try to get the minutes as soon as you can, it will help.
 
Grant documents, having samples—especially executives when they get their grants for the year—make sure you have copies of those, because your auditors are probably going to ask for them.
 
Employment contracts, if you have new officers or new people who are getting a significant number of shares.  Support for any items you calculated fair values for, and what the methodology was.  If you're pretty consistent, then I think it’s easier to provide this.  You know what you did to come up with your fair values, so be ready to prove out all of those assumptions.
 
Because of ASU 2016-09—I think Kevin mentioned this—you might have changed the way you're booking your forfeitures.  If that’s something you changed, having the documentation ready will really help make the audit easier. 
 
If you're a private company, 409 valuations are very important.  Other technical documentation, any of your general processes, especially updates that you have had, it’s important to have documentation ready.
 
If you’ve had any unique events like modifications or acquisitions, and there was equity assumed or anything that was done with your equity, make sure you have that documented in an accounting memo or something like that.  That will help ease up the audit. 
 
Anything you want to add, gentlemen?
 
Hassan:  Just a couple of things.  For some of the people out there, you might be getting a lot of these questions right now.  Part of the reason—and I know we’re not getting into tax reform—but you're probably going to be asked, especially on named executive officers, because of the changes to the 162(m) rules.  Don’t be shocked if you start getting questions about this stuff by from tax advisors, not necessarily just your auditors.  It may be both sides of the house.  Don’t get frustrated, you can say, “Hey, I just gave it to my audit team, if you need me to provide it again, great.  But why don’t you check first.”  Sometimes, people are working independently, they don’t know that it’s already been provided.
 
Just don’t get frustrated and understand that sometimes communication can be slow on the professional advisors’ side.  If it’s been handed out, just tell them that.  If not, you might get the request before the audit team asks for it, depending on timing.
 
I would say if you give it into the tax team, just say to them, “Hey, could you make sure that it goes to the auditors as well?”
 
Storey:  And I’ll add, for any of you publicly traded companies out there with evergreen provisions, make sure you pull the Form S-8 for the financial reporting team and auditors when you're doing your shares available for future grants.  Sometimes the communication doesn’t reach the person or the team responsible.  If your plan does have an evergreen provision, usually there’s a Form S-8 that’s required to register those additional shares.  Other than that, what Kevin and Raul said, I fully agree with.
 
Fajardo:  I think we can move on to the next section.
 
Return to Index

ASC 718 Valuation Best Practice Tips

 
Cleary:  We’re going to poll the audience first.  For those of you still granting option awards—and with our tax reform, there are certainly discussions about the potential resurgence of ISOs—what option pricing model are you using?  Do you use the Black-Scholes, or binomial model, or are you using a Monte Carlo simulation, or some combination of the above?  Or maybe you don’t grant stock options at the moment? 
 
You should be seeing the poll up on your screens now.
 
Storey:  Kathleen, while people are filling out their selections, I’ve got a fun fact here on the Black-Scholes model.  Can I share that real quick? 
 
Cleary:  Go for it. 
 
Storey:  Two guys by the name of Fischer Black and Myron Scholes developed what is called the Black-Scholes model in 1973.  It was later modified by a gentleman by the name of Robert Merton.  That is why it is sometimes called the Black-Scholes-Merton model.
 
Scholes and Merton received a Noble Prize for this model in 1997.  I did not know that before today.  Just wanted to give that fun fact while the audience was filling in their answer to this question.  Probably something you didn’t know.
 
Cleary:  I knew part of that, but not all of it.  And it looks like we have a pretty good response, so I'm going to share the results.  Probably not an unexpected response, largely people who do grant options are using the Black-Scholes model.  Looks like we have a small group using a binomial model, and then some using a combination of the above.  Then of course, we have a group that’s not granting options.
 
Thank you all for participating and at least it gave you something to do besides listen to us. 
 
Okay, let’s move on now. 
 
Hassan:  Yes, actually can we just go back to those results?  That’s pretty consistent.  PwC does an annual study on which assumptions the top 100 largest companies and top 100 high-tech companies use.  It’s generally 80 to 90 percent Black-Scholes-Merton, the combination of the above is probably based on what you're granting.  But if you're basically only granting stock options that aren’t performance or market-based, you would probably be using Black Scholes.
 
This is pretty consistent with the data gleaned from those studies.  For all you people out there using the binomial, I bet the answer is you probably made the decision day one, or just didn’t want to run multiple models.
 
OK, you have selected an option pricing model because the standard requires you to do that.  There’s a difference between the two, Black Scholes is relatively simple, and most commonly used, as we just saw in our polling responses.  It has six variables at the measurement date, the price, the term, the exercise price, the expected term, the expected volatility, the dividend yield and the risk-free interest rate.
 
The two biggest drivers of value in any option pricing model are going to be the term—the longer the term, the more valuable they award; and the higher the volatility, the more volatile the award, the more valuable the award.  The fair value is going to be higher if those two inputs are higher.
 
The expected term is interesting because there’s a number of ways you can calculate it.  The SEC provided some relief when the standard came out and you might hear people talking about safe harbor.  The safe harbor method is a midpoint convention, meaning you look at each tranche of vesting, add it all up, divide it by two and come up with a midpoint of all the various tranches.
 
One thing I would suggest to you is if that’s the methodology you're using, that’s fine.  If you have enough data to say you're using something else, the midpoint convention is a statistically valid model.  But I would be reluctant to tell you, if you do have enough data to calculate an expected term, that you should still be using the SEC safe harbor method.
 
On the lattice model, the best way to describe the lattice and the Monte Carlo is you're going to go from the grant date to the ultimate vesting or cancelation date.  The lattice model is like an NCAA basketball pool where you start with the champion and you work back to the first draft, then figure out values at each particular point.  Again, a lattice or Monte Carlo is required for awards that have more complicated assumptions, for example market conditions.  It’s most likely going to result in some third-party valuation expert being involved, although that’s not necessarily the case.  There are software packages that do have basic lattice models.
 
I'm not aware of any—Raul and Bill, jump in here—I don’t anybody that has a Monte Carlo built in, but I do know that there’s people with lattice built in.  There’s a belief that it’s a more refined estimate.  But if you have the same assumptions in both places, whether it’s the lattice or the Black-Scholes, you should get the same fair value.
 
Again, more refined estimates, that’s probably because you're looking at more changes, potential changes in the lattice and the Black Scholes.
 
Somewhat interestingly on the BSM model, it’s good for a period of time.  It’s good for 90 days on either side of the term assumption.  Once you go outside of that, it becomes a bit more complicated.  And again, the term is an assumption that’s input into Black-Scholes, where in a lattice model, term is an output.
 
It’s a different way of getting at the value.  You see in the corner here, in the beginning there was this big concern about whether you could change option pricing models, and people said, “No, well that’s an estimate.”  So could you switch from Black-Scholes to lattice and back and forth?  Yes, you can if you believe it’s going to be a better estimate of fair value.
 
One thing you can't do is try to use a Black Scholes model as currently constituted to value a market condition award.  I know some people may say, “Well, there’s some ways you can modify the Black Scholes to take into account some of the concerns on the lattice.”  The point I want to make is the basic core Black-Scholes-Merton model is not something you can use for market conditions.
 
Raul?  Bill? 
 
Storey:  A lot of the clients we work with primarily utilize the Black-Scholes model.  For clients who are granting market-based awards, we do have some valuation experts in the industry who calculate those values very well.
 
The accounting is not too challenging, but doing the actual Monte Carlo valuation, most clients defer that to the experts.
 
Fajardo:  I agree with that.
 
Hassan:  OK.  I guess we can move on.  This next slide shows what I had mentioned in the earlier slide, which is the term assumption.  The longer the term, meaning the length of time towards a contractual term, the higher the fair value is going to be.  And again, it’s a time element.  You're going to have more of a time value of money as you go along.  The contractual term should not be used right now.  It has to be used for non-employee consultants and we’ll talk about what’s to come there.
 
A couple of things when determining the term.  You should not factor in forfeitures that are occurring prior to vesting.  However, cancellations that occur after vesting need to be in your pool to determine the term.  Again, historical cancellations—if you leave with one thing today, a cancellation happens after the award has been earned.  A forfeiture occurs before.  Some systems call both cancellations, some forfeitures.  But a cancellation, something that happens after the award is earned, needs to be factored in to determine the expected term.  However, forfeitures, awards that are never vested, should be excluded in determining the term.
 
This is what I'm getting to, the simplified method for plain vanilla options, that’s what I call the safe harbor.  And ASU 2016-09 actually said that non-public companies can use that method—before this was SEC guidance, it wasn’t FASB guidance, but FASB now confirmed that non-public companies can use this method.
 
Anybody else on term?
 
Storey:  It’s one of the most important assumptions because it also impacts the others you're going to talk about.
 
Hassan:  OK, now volatility.  The higher the volatility, the higher the fair value, again because of the nature of how the calculation works.  What does volatility mean?  In simple terms, it’s the measurement of how the stock is supposed to go up or go down, over the term that we just talked about.
 
A couple of things to think about.  Historical volatility used to be the way everybody did it, the standard, but that’s not the only methodology available.  The thought here is if you have sufficient stock history, you can use your company’s historical volatility, and these are using simple averages.
 
A newly public company who may not have sufficient history, can use peer groups.  You would find other publicly traded companies similar to yours and use their stock history.
 
Then the third one is implied volatility.  But a couple of things to think about here.  Not all companies have publicly traded options but may have publicly traded debt.
 
A couple of things here.  Assess the stock price history and review your peer groups.  Just because you have the peer group today may not be the same peer group that you're going to use next year.  Sometimes when companies get acquired and they go into a new company all of a sudden, they may be so large that they're not comparable to use any more.  For example, a small-medium, mid regional bank shouldn’t try to compare their volatility to Bank of America, Citigroup or JP Morgan Chase.  You can blend multiple peers, but if you do, be consistent and document what you're doing. 
 
One thing I will tell you on peer groups, you may have different peer groups for different items.  And you don’t want to go to your peer companies and get their volatility number out of their footnote.  You need to recalculate the peer group similar to how you would calculate your own historical volatility.
 
Raul and Bill? 
 
Fajardo:  I agree, when it comes to peer group volatility, sometimes it is difficult to determine which companies to use.  But it’s a key input.
 
Storey:  I’ll just add that if you're downloading the ticker symbols to Excel, assuming that your database solution can't do that, we do have an opportunity to do that automatically for you.  We do see peer group volatility used quite a bit with our clients.
 
Hassan:  Bill, you can talk to this a little bit?  I know that there were some recent changes.  People used to use one source to get the ticker results, whether it was Google or Yahoo Finance, and things had changed.  I know within our firm, we had to go back and start looking for data in different ways.  It wasn’t being adjusted.
 
I think that if you are going to pull the ticker symbol yourself, make sure you have the comparable data that’s out there.
 
Storey:  Yes, that is key.  Not to hide anything, but Yahoo Finance had a way to download the tickers into Excel pretty quickly through an API link.  For whatever the reason, that link became disabled [in April/May 2017].  We still find ourselves going to the site, downloading those tickers and pulling the adjusted prices because there could be a dividend, or a stock split, and you want to make sure you use the adjusted price if it’s available.  If not, we recommend clients consider utilizing another service where that work is done for you.  You're likely going to have to pay for it, as you take your chance with using the data that’s publicly available.
 
We do use Yahoo Finance quite a bit.
 
Hassan:  OK.  I'm just bringing it up because I knew there were some issues.
 
Storey:  You hit it on the head, my friend.
 
Hassan:  OK, on the risk-free rates, just very high level.  The higher the rate, the higher the fair value.  But this is less important in terms of impact on the fair value.  We’re just trying to show directionally how it works.
 
It’s the yield currently available on U.S. Treasury zero coupon bonds, with the term equal to the expected term of your options.  You may have to interpolate between a specific term— your expected term might be at 5.5, so you're going to have to do calculating between five and six to get there.
 
What this is trying to help with is the time value of money and the risk geared to the expected term of the option.
 
Storey:  Yes, and we have some links at the bottom of this slide that I assume most of the people doing the Black Scholes valuation probably have saved as favorites.  The data download program allows you to download multiple rates into Excel pretty quickly.  The only issue with that is the timing of when the most recent dates are published.  Sometimes you may have to wait until the next day.
 
That next link, which is the U.S. Department of Treasury link, has the exact same information.  But you may have to copy and paste it into Excel versus downloading it directly.  Again, most of the people on this webcast probably already have those saved as favorites.
 
I want to send a special shout out to my friend, Elizabeth Dodge for pointing me in the direction of that data download program.  Because of her tip, I was able to go to the site and download the exact data I needed.  Thank you, Elizabeth, if you're listening.
 
Return to Index

FASB ASU 2016-09 Implementation

 
Hassan:  OK.  So now we’re going to talk about what we learned after the ASU came out, and we’ve got another polling question.
 
Cleary:  We will do this polling question quickly, because we are getting short on time. 
 
In accordance with ASU 2016-09, did your company or client, if you're a consultant, elect to continue estimating forfeitures under the previous U.S. GAAP, or did they elect to account for forfeitures as they occur—so using a 0 percent forfeiture rate, or maybe you have not adopted ASU 2016-09 yet?
 
You should see the poll up now.  Sorry, there are limited characters available and we had to abbreviate some of these responses, but hopefully you can tell what it’s supposed to be.
 
Storey:  Kathleen, are there additional questions we can address while we’re waiting?  
 
Cleary:  We do have a “you're welcome” from Elizabeth. 
 
Storey:  Good. 
 
Cleary:  Let me close out this poll and share the results with you.  It looks like the majority have elected to account for forfeitures as they occur, so they are not using a forfeiture rate.  Interesting.
 
Hassan:  It’s funny, we were tracking some of these as the early adopters and this is pretty consistent with that.  It’s interesting—Kathleen, my reaction was the same as yours—I would have thought you’d already been tracking this for a while, you already had a process.  I think some of it is maybe software related, and some of it maybe just company related.  But it’s interesting because, it ran contrary to what I would have thought the results would have been.
 
Fajardo:  I have a different point of view, Kevin, because I thought that people would take advantage of this opportunity, having struggled to come up with the forfeiture rate assumption.  Even when they are confident enough to come up with the forfeiture rate assumption, they're scared to present it and defend it to their auditors.  Given the chance of not having to do it, I think people took that opportunity.
 
Hassan:  Yes, but I think it introduced a completely new set of potential concerns which we talked about a little earlier, including how quickly are we getting the data—especially in global companies.  How quickly is it being updated, how quickly is it getting into the model?
 
Both sides have a potential issue—that’s why there’s never a great answer on the spot.  There’s always what looks like might be the best answer, sometimes isn’t.  But I understand what you're saying, Raul.
 
Cleary:  All right.  We can go ahead and move forward.  What happened after the adoption of ASU 2016-09?
 
Hassan:  OK, a couple of things happened.  The impact of the tax changes—what ended up happening was when companies adopted, there was suddenly a big change.  You had to take the windfall and shortfalls and put them through your P&L for your tax provision.  That created volatility in your earnings and caused some people to consider non-GAAP implications, meaning that there are people now trying to disclose it.
 
One thing, if you go down the non-GAAP path, you're either going to put it all-in or take it all out.  I will tell you that there was guidance that some CFOs put out that they honestly thought it was the real cost of doing business.  People were saying under non-GAAP, we’re just going to pull it out because you don’t consider it to be cash.  They honestly disagree with people taking it out.
 
There’s forecasting and then again, we had this design change for the EPS.  You set your EPS targets with an idea of what the number was going to be and now suddenly, your EPS could be totally different.  And by the way, tax reform can get layered on this right now, too.
 
There were some real considerations with tax accounting and they bled over into other awards.  The net tax withholding, we talked about that a little earlier, and what changed was that you had the ability to withhold up to the highest marginal rate.  Again, that was 39.6 percent, now it’s 37.
 
The IRS rules didn’t change the accounting.  The three of us could probably have an hour-long discussion on whether the IRS would come out with new rules after this or not.  The bottom line is the IRS didn’t change their rules and the accounting is what changed, not necessarily the reporting or IRS reporting.
 
Guys, either one of you have anything to add? 
 
Storey:  I’ll just add that most of the publicly traded companies went through this last year.  For those of you who work for private companies, this may be new to you.  Depending on when your fiscal year starts, if it’s January 1, 2018 or later, you'll be going through this exercise here pretty soon.  But you also have a bunch of examples that you can look at on the SEC EDGAR website (https://www.sec.gov/edgar/searchedgar/companysearch.html). If you want to take a look at those, or if you need help, by all means just let us know.
 
Hassan:  OK, this is everything you want to know about the ASU in one slide.  The two biggest drivers, I think, were the upper right, and lower left.  We just talked about the tax withholding.  The threshold was increased to the maximum marginal rate which is now 37 percent.  Be careful.  Well it’s 37 plus state, local and any social taxes.
 
The upper right-hand corner, the concept that the windfall pool went away.  Whatever was in APIC is there in APIC.  All excess tax benefits and deficiencies now go to the income tax provision.
 
Then the other two changes we’ve already talked about—for forfeitures, you had a policy choice, you're going to use an estimate or actual forfeiture rate.  There was a one-time election to make when you adopted the standard.  If you change it afterwards, that’s a change in accounting, so be careful.
 
In the cash flow, windfalls are moved—the old standard had it as a financing outflow.  Now, it’s going to go back into operating expense.  The only other thing is that it was silent on how people were reporting the cash proceeds toward the withholding taxes the company was paying out of their own cash on net share withholdings.  They just align in the standard, it’s going to be financing.
 
The EPS over to the right next to cash flow—the only reason we put that in here was because at the time you were able to calculate the buy back shares under the treasury stock method with excess deductions sitting in your unsettled awards.  That went away with it going through the P&L, so that’s why it’s here.  But that’s the gist of the whole standard for public and private companies.
 
There were a couple of additional private company ones including for liability awards, you had the ability to do a one-time change to go from a fair value or a calculated value to intrinsic value, as well as we talked about the ability to use the safe harbor or the midpoint convention for your transactions.
 
Storey:  Awesome.  Kevin, did you want to go through these next couple of slides here—I know you kind of touched on them—just given the time constraints we have now?  Maybe just touch on the IRS Notice 1036 quickly?
 
Hassan:  Yes, why don’t we go to that?  The critical factor here is that the 39.6 percent rate has moved to 37 percent.  You cannot withhold at 39.6 plus something.  If you do, it’s liability accounting.  Basically, this slide tells you how it works.
 
It’s interesting, on the first million, you can withhold at 25 percent and not have a problem.  It’s only the top end that’s the issue.
 
One critical thing is what’s written in red here.  Employees may not direct their employer to apply a particular withholding rate.  The company needs to set the rate.  You do not need to use the same rate for all employees, you can do it in buckets.  But your company has to decide what the rate is.
 
Again, on this slide where we talked about the withholding required for employees but not employee board members or consultants that there is no withholding for, because you don’t expect to get a deduction for it.
 
The minimum to maximum rates to share withholding—if you're doing anything else, they can go whichever way.  There was no change in the IRS rules.  But over a million in supplemental wages requires withholding at 37 percent; up to a million is 22 percent.  However, you can still use 25 percent. 
 
The big question with any of these is do you have enough company cash to settle net share withholdings?  On this slide, I just want to talk about the first one.  Does the award agreement need to be amended?  It depends on what your agreement or plan said.  If your plan said you are only permitted to do minimum statutory withholding, then you probably need to do something else to get it changed.  The good news is that 2016-09 made that become a non-starter, it’s not a modification, so it doesn’t trigger modification accounting.
 
A couple of things that you need to look at in your plan, make sure the plan permits you to withhold above the statutory minimum.  And again, some plans were generic enough to say that you could withhold in an amount that would not trigger negative accounting consequences.  That would be fine.  The only issue is when you talk about it saying that the withholding is at the statutory minimum rate.
 
I think we’re good.  Anybody else?  Guys, go ahead.
 
Storey:  I think we’ve got it.
 
Return to Index

Next Wave of Accounting Changes

 
Hassan:  Yes, as we talked about a little bit—I mean, we could talk about this for hours—you need to think about what you're doing, how you're doing it and go from there. 
 
OK, the next wave of accounting changes.  IFRS 2—they put a standard out and it was released in June.  It became effective in January, with prospective early adoption. 
 
Just to keep it at a very high level, on the bottom two, there really wasn’t a whole lot of specific guidance on the measurement of cash settled awards, as well as the modification of them.  They put some guidance in to help conform whether you have a modification of a cash settled, or an equity settled award.
 
But the big one was the net settlement.  In the beginning, IFRS 2 required a bifurcation of the two awards, meaning that you would take part of your award and keep it fixed and part of the award and make it a liability for the piece that was going to be settled, effectively cashed out.  They ended up changing it to what was our old U.S. GAAP standard, to be at the statutory minimum and no longer be a bifurcation.
 
Again, here’s another example where I think they try to bring us to U.S. GAAP but it ended up separating with the 2016-09 update.
 
Storey:  Poor planning is what it sounds like.
 
Hassan:  I think it was in place before, but it actually came out after 2016-09.  But yes, I think it kind of happened in two vacuums for the most part.
 
Next slide—changes to modification accounting.  We just talked about and highlighted that for 2016-09.  No modification accounting needs to be considered if the award is modified but there are no changes to one of three things: the fair value, the vesting conditions, and the classification.  If you're going from equity to cash, you don’t have a choice.  They're liability awards.  If the award fair value before and after is the same, the vesting conditions are the same, and how the award is classified is the same, it’s not going to be considered a change in accounting, it’s an administrative change.  This refers to the ability to change the plan for net share withholding and was tied to the basis for why they did it.  People pushed back and said this is really a modification, but it was more just an accommodation problem from the board.
 
OK, here’s the big one.  We had non-employee accounting, as everybody here probably knows.  But if you don’t, non-employee accounting was different from employee accounting in that you didn’t have fixed grant date accounting from the date of grant.  The idea of EITF 96-18 eventually got applied into 718 for awards granted to non-employees for measurement.  Everything else was brought in, but the measurement was different.
 
They reviewed it, revised it—and by the way, this was the big difference between U.S. GAAP and international GAAP—international GAAP didn’t care where you granted the two, just what you granted, liability or equity awards.  U.S. GAAP had a different answer, in that you didn’t have a grant date or a fixed value until the award vested.
 
So, the board went through and added something.  It was released in March 2017, the period ended in June.  Twenty-four comments were submitted and you can see over on the side, we have included the comments that were submitted.  This was re-deliberated at its December 13th meeting, and we’ll go to the next slide.
 
Storey:  Really quick, Kevin.  For those of you that are following the ASC codification numbers, EITF 96-18 is now ASC Topic 505-50.  Just FYI.
 
Hassan:  So, what did they do?  They retained their original decision to measure awards at the grant date, so you still have to measure it.  You're going to measure it for the value of the instrument you put up.  There’s going to be a rebuttable presumption that the contractual term is going to be an input.  We talked about it earlier, that there was no strong feeling either way whether it would not use the contractual term.  The reason why it’s critical is the longer the term, the more valuable the award and the higher the cost.
 
This one becomes a little bit different because under the old accounting, the term would constantly come down as you went along.  Now, it’s going to be used at the beginning and you're going to use the contractual term.
 
The use of expected term is going to be allowed on an award by award basis.  You might be granting to a specific non-employee and that non-employee never held to the contractual term, so you have data to support it.  Your auditor most likely would allow you to use an expected term rather than contractual term at the grant date.  But that’s going to be something you'll have to rebut if you’re not using the contractual term.
 
For awards that are currently in process and have been marked-to-market, you will measure one last time when you adopt this standard and then stop remeasuring.  All the new awards are going to valued at the grant date and you won’t have to remeasure each reporting period.  This will be effective for fiscal years beginning after December 15^th, 2018.  Non-public entities, a year later.
 
You will be able to adopt it early but understand that there’s this last bullet at the top which was the technical improvement to 606—revenues from contracts with customers.  Part of the problem, and what they're getting at, is a lot of these awards are granted to people as part of the work they do, whether they're constructing buildings for somebody, or you're doing updates.
 
The idea is until ASC 606, and the technical improvement happens, you cannot early adopt the standard even though it will be released in Q1.
 
Cleary:  Well, we have a polling question, but I'm pretty sure everybody is happy that they don’t have to mark-to-market.  I don’t think we’ll take the time for it but we’ll take a few minutes for questions instead.
 
I have one question that came in and I sent a question back asking to clarify, but I think I understand what she’s asking.  She’s asking after the company has adopted ASU 2016-09, is it easy to re-evaluate and change their minds?  The question came in about the time we were talking about the forfeiture rate elections, so if you have elected not use a forfeiture rate, and change your mind, can you go back to using a forfeiture rate?
 
Hassan:  You can.  You're going to have to go through a change in accounting.  It’s going to have to be preferable and all that good stuff.  You had one shot to do it without any question.  If you made an election and then you decide to change it, it’s going to be a change in accounting.
 
Now saying that, is that the worst thing?  It may not be.  But again, it’s just adding complication to it.
 
Cleary:  And is the reverse true as well?  if you choose to use a forfeiture rate and then want to eliminate it, is it the same thing?  An accounting change?
 
Storey:  Same thing. 
 
Hassan:  Same concept, yes. 
 
Storey:  I have heard of some companies electing to continue estimating forfeitures, but they use zero (0%), which is somewhat of a loophole to get out of that.  Just an FYI. 
 
Hassan:  Yes.  I’d be careful with that one.
 
Storey:  Yes, agree.
 
Cleary:  All right, one more.  I hope this is quick.  If not, we can address it afterwards. 
 
The question is, “Regarding the expected term, if shares are forfeited, and they are excluded from the expected term calculation, are they removed from both the denominator as well as the shares for expected term?”
 
Fajardo:  These are for shares forfeited before vesting, if you're taking it out of the denominator.  Kevin, you were going to answer? 
 
Hassan:  I was going to say the shares shouldn’t be included at all.
 
Cleary:  Yes, I think that’s what she’s asking.  Thank you.  OK, we have one more polling question and I think I’ll put the question up as I wind up the webcast.  I’ll let everybody go ahead, because I know this was really important to Bill to get your Super Bowl pick.  If you can give him your best advice here so he can place his bet.
 
I just want to thank everyone for listening today.  I hope that you got some great tips for getting through your audit smoothly and preparing all your financial reports.  If you missed any part of the webcast or if you need to listen to a particular section again, we will be posting an archived version as soon as I can get it downloaded and converted.  It should be up later today or tomorrow.  We’ll also post the transcript within the next few weeks and that’s a great research tool as well.
 
I also want to say thanks to Raul, Kevin and Bill for all their time preparing for and presenting this webcast today.  I really appreciate it.  Thanks again to our audience for joining us today and I'm going to show you the poll results before we close.
 
Looks like we have Vikings fans on the line!
 
I hope that you will all listen in next week to our “Annual Section 16 webcast with Alan Dye.”  And if you didn’t get your questions answered, please feel free to reach out to me.  The panelists also gave you their contact information at the top of the presentation. 
 
Thanks again, everyone.  That ends our webcast for today.
 
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