ASC 718

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Stock Compensation Expense & Forfeitures

By Calvin Cheng posted 09-04-2023 22:04

  

When a stakeholder terminates service, vesting will cease and Carta’s SBC expense reports will stop recognizing any expense for vesting that occurs after the termination date.  Any expense recognized for what has legally vested as of the termination date does not reverse because the stakeholder has legally earned the option/shares.  Any previously recognized/accrued expense for what did not vest due to a termination will be reversed.

 

Key terminology:

  • Forfeited - Shares/options that are unvested at the time of a termination or cancellation.
  • Expired - Options that vested but were not exercised within the post termination exercise period (PTEP).
  • Canceled - Shares/options canceled by the company.

 

Carta’s SBC expense report determines how much expense to recognize within a time period by the following:

  1. Determine the total fair value
  2. Calculate the cumulative expense to date
  3. Subtract the prior period expense
  4. Recognize remaining as period expense

 

Let’s look at an example of an award of 10,000 options granted on 7/1/2021 with a total fair value of $10,000 ($1/option) and vest 2,500 options annually over 4 years.  The company amortizes each vesting event sequentially using the straight line method.

How much expense should be recognized for the period of 1/1/2021 to 12/31/2021?

 

The report’s ‘tranches’ tab first separates each vesting increment for each award.  The fair value for each vesting tranche is $2,500 (total fair value of $10,000 divided by 4 annual vesting tranches).

 

 

Cumulative service days up to 12/31/2021 is 184 service days (12/31/2021 minus 7/1/2021), which is 50.41% of the total 365 vesting days required.  Total expense is $2,500.  Cumulative expense is $2,500 ($2,500* 50.41%).   Prior period expense is $0.  The report will recognize $1,260.27 as period expense ($1,260.27 - $0 = $1,260.27).

 

How about 1/1/2022 to 12/31/2022?

 

 

Tranche 1

 

This tranche has vested because 100% of the 365 service days required has been provided.  Total expense is $2,500.  Cumulative expense is $2,500 ($2,500 * 100%).  Prior period expense is $1,260.27 from 2021The report will recognize $1,239.73 as period expense ($2,500 - $1,260.27 = $1,239.73).

 

Tranche 2

 

Cumulative service days up to 12/31/2022 is 184 service days (12/31/2021 minus 7/1/2022), which is 50.41% of the total 365 vesting days required. Total expense is $2,500.  Cumulative expense is $1,260.27 ($2,500 * 50.41%).    Prior period expense is $0The report will recognize $1,260.27 as period expense ($1,260.27 - $0 = $1,260.27).

 

Total expense for the period is $1,239.73 + 1,260.27 = $2,500.

 

How much expense should be recognized for 1/1/2023 to 12/31/2023 if service was terminated on 3/1/2023?

 

 

Tranche 1

 

This tranche has vested as 100% of the 365 service days required has been provided.  Total expense is $2,500.  Cumulative expense is $2,500 ($2,500 * 100%).  Prior period expense is $2,500 ($1,260.27 in 2021 and $1,239.73 in 2022)The report will recognize $0 as period expense.

  

Tranche 2

 

The 3/1/2023 termination date forfeits this tranche as it will never vest.  Total expense is $2,500.  Cumulative service days up to 12/31/2022 is 244 service days (termination date minus 7/1/2022), which is 66.85% of the total 365 vesting days required.  However, cumulative expense is $0.00 due to the termination date.  Prior period expense is $1,260.27.  The report will recognize a credit of $1,260.27 as period expense ($0 - $1,260.27 = -$1,260.27).

 

Overall, the company will recognize a total of $2,500 for the 2,500 options that are legally vested.  The company doesn’t recognize any expense for forfeited and unvested options.  In 2022, the company accrued $1,260.27 as vesting was probable at that time.  In 2023, the termination date forfeited the remaining 7,500 options and the company will recognize a credit of $1,260.27 for previously accrued expense on forfeited options.



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