One of the reports in Carta’s Financial Reporting suite is the SBC Expense report. This report provides companies with a journal entry that debits the stock compensation expense account and credits the additional paid in capital account. Overtime, companies have requested this report to include more data. As a result there currently is a lot of things happening within this report. However, we only have to look at several columns to understand what is happening in the report.
This walkthrough is intended to provide a simplified overview on how expense is determined for standard time-based vesting options and restricted stock. I will not talk about how to estimate for future forfeitures, awards with performance/milestone based vesting schedules, ISO/NSO split awards, modifications/repricings, or cost center allocation.
IMPORTANT: any awards listed in the ‘Errors’ tab are excluded from the report. Until the errors have been resolved, the report is considered incomplete and companies should not use it for a ‘base report’ when building the subsequent reporting period.
Many errors are related to data issues (over-exercises, missing stakeholder relationships, missing cancellation treatment, etc.). If you need assistance understanding or resolving an error, please reach out to us by sending an email to firstname.lastname@example.org.
The calculation of expense can be seen in the ‘tranches’ tab which lists each vesting increment in its own row.
Bring over the fair value per share from the ‘option values’ and ‘intrinsic values’ tabs (column E)
Multiply the fair value per share by the quantity of shares to determine the total fair value (column F)
Determine the % of service completed (column I) by dividing the number of service days completed (column G) and the total service days (column H)
Multiply % of service completed by the total fair value to determine the cumulative expense to date (column J)
The journal entry for total expense for the period (column L) is the cumulative expense (column J) minus what has already been recognized in prior periods (column K)
Report period 1/1/2021 to 12/31/2021:
Report period 1/1/2022 to 12/31/2022: