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Category Archives: Forfeitures

March 23, 2017

Jettisoning Estimated Forfeiture Rates

Now that ASU 2016-09 allows companies to record expense for service-based awards without applying an estimated forfeiture rate to the accruals (see “Update to ASC 718: The FASB’s Decisions“), some our readers may be wondering how to make the transition to accounting for forfeitures as they occur. This is done by recording a cumulative adjustment to retained earnings in the period you adopt the ASU. In today’s guest blog entry, Elizabeth Dodge of Equity Plan Solutions explains how to calculate this adjustment (which she refers to as a “true-up amount”).

How to Get Rid of Your Estimated Forfeiture Rate

By Elizabeth Dodge, Equity Plan Solutions

So, you’ve decided to get rid of your estimated forfeiture rate… or at least decided to consider it. Congratulations! I recommend the elimination of an estimated forfeiture rate to all my clients. It simplifies equity accounting in so many ways.

Now how do you DO it? And better yet, do it without the auditors crawling all over you with time-consuming questions?

The short answer to the first question is:

  1. Run an expense report, life-to-date WITH your current estimated forfeiture rate.
  2. Run an expense report, life-to-date with a ZERO forfeiture rate.
  3. Compare “To Date” (aka cumulative) expense (or, if your report doesn’t give you To Date, add prior and current expense and compare that).

The difference is your true up amount. Yes, it’s that easy. Yes, proving it’s correct is a little harder. More on that later.

Note: If you are using a system that delays the reversal of expense to the VEST DATE, it’s not QUITE this easy, but that is outside the scope of this article.

Why life-to-date?

Can’t I just run the current period report with and without the rate and take the difference in To Date (aka cumulative) Expense. Yes, you SHOULD be able to do that, but your auditors will want to kick the tires on your analysis and having ALL your grants on the report will help them do that. And life-to-date (LTD) should be from your adoption of FAS 123(R) (now known as ASC 718)—January 1, 2006 for many companies—until the end of your most recent reporting period—December 31, 2016 for many companies.

So now how do you tick and tie the numbers to your auditors’ satisfaction?

The approach I’ve used thus far with all my clients that have early adopted or considered adopting is to create a spreadsheet with four tabs:

  1. LTD Expense Report With a Forfeiture Rate
  2. LTD Expense Report Without a Forfeiture rate
  3. Comparison tab
  4. Summary tab

The Comparison tab has one row per grant and indicates the grant date, unvested shares (optional), final vest date and cancel date, if any, for each. It also pulls in expense from tab 1 and tab 2 and compares them in a “Variance” column. Then I add a “Reason” column that categorizes the grants into (generally) three categories:

  • Fully Vested, No Cancellation: These grants should have no expense variance.
  • Cancelled: These grants should have no expense variance (unless you are using True Up at Vest).
  • Still Vesting, No Cancellation: All grants should have higher expense on the Without Forfeiture Rate tab

You could assign these categories by using formulas. I usually use the low-tech method of filtering for a given criteria and then pasting the Reason down through all the rows to which it applies.

On the Summary tab, I summarize the expense totals from both tabs and then use a pivot table to summarize the reasons (or categories) and the associated variances (or lack thereof):

Summary Tab

Thus far no auditors have had an issue with this approach. (Of course, now that I’ve said that, I’ve jinxed myself.) Have at it! And have fun!

Dodge_SqElizabeth is a Principal for Equity Plan Solutions, LLC, providing equity compensation consulting services to companies from startups to large public corporations. Previously, Elizabeth was a consultant and Vice President for Stock & Option Solutions, Inc. and held product management roles in stock plan services at BNY Mellon and ETRADE Corporate Services. Elizabeth became a Certified Equity Professional in 1999 and co-authors the chapter on accounting in The Stock Option Book. She also serves on the Executive Advisory Committee of the National Association of Stock Plan Professionals and was honored with the NASPP Individual Achievement award in 2012. You can contact Elizabeth at

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May 17, 2016

Update to ASC 718: Survey Says

For today’s blog entry, I have the results of the NASPP’s Quick Survey on ASC 718, presented in a nifty interactive infographic (place your cursor over a section of each chart to see its label). (Click here if you don’t see the graphic below.)

Create your own infographics

BTW—if you are one of the 83% of respondents that haven’t yet figured out the impact of the tax accounting changes to your earnings per share, see my blog entry “Run Your Own Numbers,” for easy-peasy instructions on how most companies can figure this out in just 5 minutes. It’s a great opportunity to demonstrate your knowledge and value to your accounting/finance team.

– Barbara

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April 7, 2016

Final Update to ASC 718

As noted last week, the FASB has issued the final Accounting Standards Update to ASC 718. Here are a few more tidbits about it.

The ASU Has a Name

Handily, the ASU now has a name that we can use to refer to it:  ASU 2016-09. Now I can stop calling it “the ASU to ASC 718,” which was awkward—too many acronyms.

Transition Wrinkle

One surprise to me is how the transition works if the ASU is adopted in an interim period other than the company’s first fiscal quarter.  When the ASU is adopted in Q2, Q3, or Q4, the update requires that any adjustments required for the transition be calculated as of the beginning of the fiscal year. Consequently, where companies adopt the ASU in these periods, they will end up having to recalculate the earlier periods in their fiscal year (and restate these periods wherever they appear in their financial statements), even if the transition method is prospective or modified retrospective, which normally would not require recalculation or restatement of prior periods.

For example, if a company adopts the ASU in its second fiscal quarter, the company will have to go back recalculate APIC and tax expense as required under tax accounting approach specified in the ASU for its first fiscal quarter.  Likewise, if the company decides to account for forfeitures as they occur, the company will have to recalculate expense for the first fiscal quarter under the new approach and record a cumulative adjustment to retained earnings as of the beginning of the year, not the beginning of Q2.

While I can understand the rationale for this requirement, it is different than how I expected the transition to work for interim period adoptions.

No Other Surprises

The ASU 2016-09 seems to be an accurate reflection of the decisions made at the FASB’s meeting last November and documented ad nauseam here in this blog. I still haven’t read every last word of the amended language in the ASC 718, but I don’t think there are any other significant surprises.

For more information on ASU 2016-09, be sure to tune in to the NASPP May webcast, “ASC 718 in Motion: The FASB’s Amendments.”

– Barbara

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March 30, 2016

It’s Here! FASB Issues Update to ASC 718

Just in the nick of time to make their Q1 deadline, the FASB has issued the Accounting Standards Update to ASC 718. Now that the ASU has been issued, companies are free to adopt it.

Here are answers to a few questions you might have:

When do companies have to adopt the ASU?

Public companies have to adopt it by their first annual and interim fiscal period beginning after December 15, 2016. Private companies get an extra year to adopt it for annual periods and an extra two years for interim periods.

Do companies have to adopt the whole ASU at once?

You betcha!  I’ve said it before: this isn’t a salad bar!  You can’t pick and choose the parts of the ASU that you like: it’s all or nothing.

Can we adopt the ASU this quarter even though the quarter ends tomorrow? 

Yep, you sure can.  If you are prepared to change over to the new tax accounting procedures, have already decided whether you want to change how you account for forfeitures (and, if you are changing approaches, are ready to go with the new approach), and are prepared to comply with any other aspects of the ASU that apply to your company, you can adopt it in this quarter. But if you aren’t ready to go on any aspects of the ASU, you might want to wait until at least Q2 to give yourself a little more time.

Do we have to adopt it in this quarter if we want to adopt early? 

No, this is not required. Companies can adopt it in any interim period up until they are required to adopt the update.

Are there any surprises in the final ASU?

Got me.  I’m actually on vacation this week.  I’m at spring training in Phoenix—where ASU stands for Arizona State University and I’m sitting four rows back behind home plate.  I wrote this last week, before the FASB had issued the ASU, just in case.  With the end of the quarter imminent, I wanted to have a blog entry ready to go so that any NASPP members whose employers want to adopt the ASU in Q1 would know that it had been issued.  But I haven’t had a chance to do anything more than skim the ASU between innings.

I plan to have more complete coverage when I’m back in the office next week. For now, go A’s!

– Barbara

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January 19, 2016

Update to ASC 718: Early Adoption

For my last installment (at least for the moment—expect another blog when the FASB officially adopts the new standard) in my series on the FASB’s ASC 718 simplification project, I answer a few questions relating to early adoption of the new standard.

Can companies adopt it early?

Yes, companies can adopt the amended standard in any interim or annual period after the FASB approves the official amendment. If the FASB approves the amendment as expected in this quarter, companies could adopt it in this quarter.

Can companies adopt it now?

No, not quite yet. Companies have to wait until the final amendment is approved by the FASB to adopt it.

Can companies adopt just the parts of the update they like early and wait to adopt the rest of it?

Heck no! This isn’t a salad bar; it’s all or nothing. You have to take the bad with the good.

If we start allowing employees to use shares to cover tax payments in excess of the minimum required withholding now, are my auditors really going to make me use liability accounting, given that we all know the rules are changing soon?

Well, I can’t really speak for your auditors, so you’d have to ask them—accounting-types do tend to be sticklers for the rules, however. If the FASB approves the amendment on time, you could adopt it this quarter and there’d be no question about liability treatment. But you’d have to adopt the whole standard, including the tax accounting provisions, so you would want to make sure you are prepared to do that.

If you don’t want to adopt the entire update as soon as the FASB approves it, liability treatment applies if shares are withheld for more than the minimum tax payment. For awards that are still outstanding when you adopt the update, this liability treatment will go away. You’ll record a cumulative adjustment at the time of adoption (see my blog last week on the transition) to switch over to equity treatment. But for the awards that are settled prior to when you adopt the standard, you won’t reverse the expense you recognize as a result of the liability treatment.

If the awards that will settle between now and when you expect to adopt the standard are few enough, the expense resulting from the liability treatment might be immaterial. Likewise, if your stock price is at or below the FMV back when the awards were granted, you might not be concerned about liability treatment because it likely wouldn’t result in any additional expense.

Note, however, that if you establish a pattern of allowing share withholding for excess tax payments, liability treatment applies to all awards, not just those for which you allow excess withholding. You could have liability treatment for all award settlements that occur before you adopt the amended standard.

– Barbara

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January 5, 2016

Update to ASC 718: Transition

For my first blog entry of 2016, I look at the transition methods that will apply under the FASB’s Accounting Standards Update (ASU) to ASC 718.  (If you’ve forgotten what this is all about, read Part I and Part II of my update on the FASB’s decisions on the ASC 718 simplification project.) Also, see my handy chart showing how FASB voted on each issue in the exposure draft and the required transition method for it.


The prospective transition method is perhaps the easiest to understand. Under this method, the company just changes its accounting procedures on a go-forward basis, with no restatement of prior periods or cumulative adjustments.

The prospective transition method will be used for the tax accounting provisions. For transactions that occur after a company adopts the ASU, the amounts that would have been recorded to additional paid-in capital will now simply be recorded to tax expense. It’s that easy: no adjustments to paid-in capital or tax expense for past transactions and the ASC 718 APIC pool calculation is no more.


Retrospective transition is also fairly straightforward. With this method, the company changes its accounting procedures going forward, but also adjusts any prior periods reported in its current financials. For example, most companies show three fiscal years in their annual financial statements.  Where retrospective transition is required, a company that adopts the ASU in 2016 would not only change their accounting procedures for 2016, but would go back and adjust the 2015 and 2014 periods as if the new rules had applied in those periods.

The adjustment is presented only in the current financials; the company does not reissue any previously issued financial statements or re-file them with the SEC.

The only provisions in the ASU that are subject to retrospective transition are the provisions related to classification of amounts reported in the cash flow statement (and for the classification of excess tax benefits, the company can choose between prospective and retrospective).

Modified Retrospective

This transition method is used when a cumulative adjustment is necessary.  Accounting for forfeitures is a good example. A company can’t just switch from applying an estimated forfeiture rate to accounting for forfeitures as they occur on a prospective basis: since previously recorded expense was adjusted based on estimated forfeitures, companies would end up double-counting forfeitures when they occur.  Retrospective restatement wouldn’t fix this problem because some of the prior expense may have been recorded outside of the periods presented in the company’s current financials.

It also doesn’t make sense to make companies record a big change in expense in their current period; this would be confusing (and possibly alarming) to investors and isn’t reflective of what is happening.  So instead, the transition is handled with a cumulative adjustment that is recorded as of the start of the fiscal period.  This adjustment is recorded in retained earnings (which is the balance sheet account where net earnings end up) with an offsetting entry to paid-in capital.

In the case of forfeitures, the company calculates the total expense it would have recognized as of the start of the period if it had been accounting for forfeitures as they occur all along and compares this to the actual amount of expense recorded to date (which should generally be lower).  The difference is then deducted from retained earnings, with a commensurate increase to paid-in capital.

In addition to the forfeitures provision, modified retrospective is used for private companies that take advantage of the opportunity to change how they account for liability awards.  It is also used theoretically for the share withholding provisions if companies have been allowing employees to tender shares in payment of taxes in excess the minimum statutorily required withholding and has outstanding awards that are subject to liability treatment as a result.  But I doubt anyone has been doing that, so in practice, I don’t think a transition will be necessary for the share withholding provisions.

– Barbara

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December 1, 2015

Update to ASC 718: The FASB’s Decisions

Last Monday, the FASB met to review the comments submitted on the exposure draft of the proposed amendments to ASC 718.  I have been watching the video of the meeting (and you can too) and have made it about half way through.  After getting over my shock that no one on the Board has mentioned what a finely crafted comment letter I submitted, here’s what I’ve learned so far. (See the NASPP alert “FASB Issues Exposure Draft of ASC 718 Amendments” for a summary of the exposure draft).

Tax Accounting

The most controversial aspect of the exposure draft is the proposal to record all excess tax benefits and shortfalls in tax expense.  Despite the fact that the overwhelming majority of letters submitted opposed this (see my Nov. 10 blog “Update to ASC 718: The Comments“)—including my own aforementioned finely crafted letter—and the FASB staff’s recommendation that the excess benefits and shortfalls be recognized in paid-in-capital instead, the Board voted to affirm the position in the exposure draft.  I was a little surprised at how little time the Board spent considering the staff’s recommendation.

The Board decided that stock plan transactions could be treated as “discrete items” that do not need to be considered when determining the company’s annual effective tax rate.  I don’t know a lot about effective tax rates, but I’m guessing that this is poor consolation for the impact this change will have on the P&L.

Estimated Forfeitures

The Board affirmed the proposal to allow companies to make an entity-wide decision to account for forfeitures as they occur, rather than estimating them.  At one point, the board was considering requiring companies to account for forfeitures as they occur (without even re-exposing this decision for comment), which was a little scary. I think most of us have supported this proposal primarily on the basis that companies can keep their current processes in place if they want; I’m not sure it would have received as much support if accounting for forfeitures as they occur had been mandatory (this wasn’t even mandatory under FAS 123).  Thankfully, the Board backed off from that suggestion.

Share Withholding

The Board affirmed the decision to expand the share withholding exception to liability treatment, in spite of concerns that the potential cash outflow without a recorded liability could be misleading for users.  For one nail-biting moment, eliminating the exception altogether was on the table (in my amateur opinion, this would seem to go well beyond the scope of what is supposed to be a “simplification” project, given the considerable impact this would have on practices with respect to full value awards).  Luckily, this suggestion did not receive any votes (not even from the Board member who suggested it, oddly enough).

Stay Tuned

More on the rest of the FASB’s decisions in a future blog entry.

– Barbara

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November 10, 2015

Update to ASC 718: The Comments

As followers of this blog know, the FASB recently issued an exposure draft proposing amendments to ASC 718 (see “It’s Here! The FASB’s Amendments to ASC 718,” June 9, 2015).  In today’s blog, I take a look at common themes in the comment letters on the exposure draft.

A Lot Less Controversial

The FASB received just under 70 comment letters on the exposure draft, making this proposal far less controversial than FAS 123 or FAS 123(R) (by contrast, the FASB heard from close to 14,000 commenters on FAS 123(R)).  In general, the letters are supportive of the proposed amendments.

Opposition to Proposed Tax Accounting

The area of most controversy under the exposure draft is the proposal to require all tax effects (both excess deductions and shortfalls) to be recognized in the income statement.  Virtually all of the letters submitted mention this issue and this was the only issue that a number of letters address. A little over 70% of the letters oppose the FASB proposal. About half of the letters suggest that all excess deductions and shortfalls should be recognized in paid-in capital, instead of in earnings.

Many commenters mention the volatility the proposed approach would create in the P&L and express concern that this would be confusing to the users of financial statements. This is the argument we made in the NASPP’s comment letter (see “The NASPP’s Comment Letter,” August 18).

Here are a few other arguments in opposition of the FASB’s proposal that I find compelling (and wish I had thought of):

  • Several commenters refer to the FASB’s own analysis (in the Basis for Conclusions in FAS 123(R)) that stock awards comprise two transactions: (i) a compensatory transaction at grant and (ii) an equity transaction that occurs when the award is settled.  They point out that it is inconsistent to recognize the tax effects of the second transaction in income when the transaction itself is recognized in equity.
  • Several commenters point out that the increase or decrease in value between the grant date and settlement is not recognized in income, therefore it would be inconsistent to recognize the tax effects of this change in value in income.
  • One commenter points out that this would merely shift the administrative burden from tracking the APIC pool to forecasting the impact of stock price movements on the company’s earnings estimates, negating any hoped for simplification in the application of the standard.

Share Withholding

The comment letters overwhelming support the proposal to expand the exception to liability accounting for share withholding. Several letters point out what appears to be an inconsistency in the language used to amend the standard with the FASB’s described intentions.  While the FASB indicated in its discussion of the exposure draft that it intended to permit share withholding up to the maximum individual tax rate in the applicable jurisdiction, the proposed languages refers to the individual’s maximum tax rate. Also, the exposure draft appears to have inadvertently excluded payroll taxes from the tax rate. Hopefully these are minor issues that will be addressed in the final update.

One commenter suggests that, for mobile employees, companies should also be allowed to consider hypothetical tax rates that might apply to individuals under the company’s tax equalization policy for purposes of determining the maximum withholding rate.


While the letters also were very supportive of the proposal to allow companies to choose to recognize forfeitures as they occur, I was surprised to find that a couple of letters suggested that companies should be required to recognize forfeitures as they occur.

What’s Next?

The comment period ended on August 14, so the FASB has had close to two months to consider the comments.  I heard a rumor at the NASPP Conference that the Board will discuss them at one of its November meetings but I haven’t seen anything on this in the FASB Action Alerts yet.  I expect that we won’t see the final amendments until next year.  Given the controversy of the tax accounting proposal, possibly late next year.

– Barbara


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August 18, 2015

The NASPP’s Comment Letter

In today’s blog entry, I provide a summary of the NASPP’s comment letter on the FASB’s proposed accounting standards update (ASU) on ASC 718.

[This blog entry won’t make any sense if you aren’t at least minimally familiar with the proposed ASU.  For a summary of the proposal, see the NASPP Alert “FASB Issues Exposure Draft of ASC 718 Amendments” and my June 9 blog entry “It’s Here! The FASB’s Amendments to ASC 718.”]

Tax Accounting

This is the most controversial aspect of the exposure draft.  The volatility that this change introduces to the P&L is likely to be significant for companies that rely heavily on stock compensation.  We performed a very quick analysis of a handful of companies and found that, for several of them, recognizing excess tax benefits in their P&L would have increased EPS by 10%. In one case, EPS increased by 60%. Ultimately, we think this will be incredibly confusing to investors and other financial statement users.  We also feel that it is highly unintuitive for changes in a company’s stock price to generate significant profits and losses for the company.  While eliminating the ASC 718 APIC pool is very attractive, ultimately, we felt that the impact on earnings and effective tax rates would offset the benefits of simplifying this area of the standard. Because of this, we recommended against this amendment.

We suggested that companies record all excess tax benefits and shortfalls to paid-in capital, rather than tax expense. This would eliminate the need to track the APIC pool without impacting the P&L.


We supported the proposal to allow companies to make a policy election to account for forfeitures as they occur. Our only comment on this topic was to suggest that the FASB provide a mechanism for companies to change their election without treating it as a change in accounting principle (which requires a preferability assessment and retrospective restatement).

Share Withholding

We supported the proposal to amend the standard to provide that shares can be withheld to cover taxes up to the maximum individual tax rate without triggering liability treatment.

We asked the FASB to provide additional guidance on how this requirement applies to mobile employees and suggested that share withholding be allowed up to the combined maximum tax rate in all jurisdictions that the transaction is subject to.

We also asked the FASB to remove the requirement that the tax withholding be mandated by law.

Practical Expedient to Expected Term

We supported allowing private companies to treat the midpoint of the vesting period and contractual term of an option as the option’s expected term for valuation purposes.  We asked the FASB to remove the condition that the option be exercisable for only a short period of time after termination of employment and also requested removal of the conditions applicable to performance-based options.

The Rest of It and Thanks

We supported the remaining proposals in the exposure draft without comment.

Thanks to everyone that completed the NASPP’s quick survey on the exposure draft—I hope to have the results posted by the end of this week.

Thanks also to individuals who agreed to serve on our task force for this project:  Terry Adamson of Aon Hewitt, Dee Crosby of the CEP Institute, Elizabeth Dodge of SOS, Sean Kelly of Morgan Stanley, Ken Stoler of PwC, Sean Waters of Fidelity, Thomas Welk of Cooley, and Jason Zellmer of Bank of America Merrill Lynch. Their help was invaluable.

Read the NASPP’s comment letter.

– Barbara

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June 9, 2015

It’s Here! The FASB’s Amendments to ASC 718

The FASB has issued the exposure draft of the proposed amendments to ASC 718.  The FASB alert showed up in my email at approximately 1 PM Pacific yesterday and it’s 105 pages long.  Suffice it to say, I haven’t exactly read the whole thing yet.  Here are some initial thoughts based on a quick skim of the draft.

Don’t remember what the proposed amendments are about? Refresh your memory with my blog entry “Proposed Amendments to ASC 718 – Part I.” Also, don’t miss the 23rd Annual NASPP Conference, where we will be waxing nostalgic about the first ten years under ASC 718 (FASB Chair Russ Golden is even going to say a few words) and will have special session focused on the steps companies need to take to prepare for the amendments.

I Thought This Was About Simplification

105 pages!  Come on. The whole entire standard including all the illustrations and basis for conclusions was only 286 pages. This “simplification” is over one-third the length of the original standard.

There’s More to It Than You Might Think

I’ve been focusing on just three areas that will be amended, but the exposure draft addresses nine issues.  Two of the issues relate to the classification of stuff on the cash flow statement (snore).  Three relate to private companies—I’ll get to these in a subsequent blog entry. And one makes FSP FAS 123(R)-1 permanent, which is a relief.  You will recall that this relates to the treatment of options that provide for an extended time to exercise after termination of employment. Perhaps I wasn’t paying attention, but I wasn’t aware that the FASB was considering this.

Share Withholding

The proposed amendments relating to share withholding clarify that the company must have a withholding obligation to avoid triggering liability treatment. So share withholding for outside directors and ISOs will still trigger liability treatment.  But, as expected, where the company is obligated to withhold taxes, the proposal allows share withholding for taxes up to the maximum individual tax rate. The proposal doesn’t address mobile employees (i.e., can you use the maximum rate out of all of the applicable jurisdictions?) or whether rounding up is permissible if you are withholding at the maximum rate.

Tax Accounting

Also, as expected, the proposal provides that all tax effects will run through the income statement.  What may come as a surprise is that this eliminates the tax benefit under the Treasury Stock Method calculation used for diluted EPS.  Because net earnings (the numerator of EPS) is reduced for the full tax benefit to the company, there won’t be any adjustment to the denominator for this benefit anymore.

Expected Forfeitures

For service conditions only, the proposal would allow companies to account for forfeitures as they occur, rather than applying an estimated forfeiture rate to expense accruals. For performance conditions, however, companies will still be required to estimate the likelihood of the condition being achieved.


Comments on the exposure draft can be submitted using the FASB’s Electronic Feedback Form and must be submitted by August 14, 2015.

– Barbara



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