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SEC Comments on Stock Compensation

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March 25, 2014 | Barbara Baksa

SEC Comments on Stock Compensation

PricewaterhouseCoopers has published a summary of SEC comments on stock compensation ("2013 SEC Comment Letter Trends: Employee Stock Compensation," available in the NASPP's Surveys & Studies Portal).  The comments were made in the course of the SEC's review of various types of public filings (mostly Forms S-1, but also some Forms 10-K and other filings). I thought it would be interesting to take a look at what PwC found for today's blog.

Companies Targeted

The majority (79%) of the companies to receive comments were technology, pharmaceutical, and life science companies.  But don't read anything into this--as noted above, the majority of the SEC's comments were on S-1 filings, and these industries represented the majority of IPOs last year (particularly IPOs where employees held substantial amounts of stock compensation).

Areas Commented On

81% of the SEC's comments related to information on stock compensation included in the MD&A.  Of the comments related to the MD&A, 90% related to the discussion of critical accounting policies, et. al., for stock compensation.  Based on the sample comments excerpted by PwC, it seems that many of these comments requested more information on the valuation of the company's stock on grant dates. 

Types of Comments

PwC found that, overall, 50% of the comments related to disclosure, 41% related to valuation, and 9% related to other accounting issues.  Of the 41% of comments related to valuation, many of these seem to relate to the valuation of the company's underlying stock on grant dates, rather than the valuation of stock options.  Also, a little over one-third of the comments that PwC classified as disclosure-related were on the disclosures related specifically to valuation. Another 29% were on disclosures related to IPOs; many of these comments focused on valuation of the company's stock (specifically on the differences between the most recent valuation and the IPO price). 

Accounting Recognition Comments

Not much here. PwC notes that:

"Interestingly, we did not come across many comments related to some of the more complex areas of stock compensation accounting. For example, we saw only one comment on classification of awards as equity verses liability, no comments on expense attribution methodology, one comment on award modifications, and no comments on determination of the grant date."

Key Takeaways

Overall, it seems that the SEC either (1) focused primarily on stock valuation-related issues in their review of stock compensation info in public filings, or (2) focused on everything but simply didn't find much to comment on beyond the stock valuation issues. 

If you are a public company, this is probably good news.  Because your stock is publicly traded, so long as your grant dates are accurate, there's not a lot for the SEC to question with regards to your stock value.  But if you are a private company, you'll want to make sure your house is in order when it comes to grant date stock valuations. 

- Barbara

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