Stock options in Silicon Valley are like free drinks in Las Vegas—and accounting for equity-based compensation often gets treated with the breezy inattention of a gambler ordering another round. But eventually some kind of tab will come due. Think company money and time, restatements and increased auditors’ scrutiny.
Our new report, Stock Options: Do You Have a Problem? by Kelley Wall of RoseRyan’s Technical Accounting Group walks you through the issues we see regularly and tells you how to get clean.
Don’t think this applies to you? Equity-related restatements most often stem from honest mistakes—and they’re more common than you might think. Why? Some companies aren’t fully aware of accounting requirements. Others have incomplete or broken internal processes. And some rely on equity systems with parameters and limitations they don’t really understand.
Let’s take one example. Stock-based awards to employees and nonemployees are accounted for differently. No big deal—but the problem we’ve observed is that companies fail to identify nonemployee recipients as nonemployees. Perhaps the stock administrator assumes all the grantees on a list of option grants are employees. Or the equity administrator doesn’t set up the system to identify both the individual and the grant as nonemployee. Or the accounting department doesn’t realize there are nonemployee awards, so it doesn’t ask for nonemployee stock-based compensation expense reports. In each case, the result is an understatement of expense.
You can avoid this and many other costly accounting mistakes by adopting our recommended best practices in the areas of communication, valuation, modifications/special arrangements and forfeiture rate estimation.
Don’t become yet another sobering example of a painful accounting breakdown. Check out our report to ensure that your equity compensation practices are up to snuff.
