navigating a change in service providers prash shukla global shares brock benson icomp llc
TRANSCRIPT
Navigating a Change in Service Providers
Prash Shukla
Global Shares
Brock Benson
iComp LLC
Agenda
• Introduction• Reasons for moving• Common misunderstandings• Key migration elements
Reasons for moving
• Cost• Functionality• Global consolidation• M&A• Relationship• Sox/SAS 70• Accounting• Accuracy
Common misunderstan
ding
• Single source migrations are simple• Relatively small process changes• Short migration times• Small involvement from the client
(departments)• Old and new providers can sort
things out amongst themselves
Key migration elements
• Data• Reconciliation• Reporting (FAS123R/IASB)• Processes• Audit• Reporting (operational)• Communication
Data & Reconciliation
Reconciling data between two systems
Control Totals: Comfort or No Comfort at All?
• For some reason, control totals give people warm-fuzzies
• What do control totals really tell us?• Is that enough information?• The following six slides depict data
with identical control totals
Control Totals: Comfort or No Comfort at All?
Original Shares Granted Over Time
0
20000
40000
60000
80000
100000
120000
140000
2/1
1/1
99
9
5/1
1/1
99
9
8/1
1/1
99
9
11
/11
/19
99
2/1
1/2
00
0
5/1
1/2
00
0
8/1
1/2
00
0
11
/11
/20
00
2/1
1/2
00
1
5/1
1/2
00
1
8/1
1/2
00
1
11
/11
/20
01
2/1
1/2
00
2
5/1
1/2
00
2
8/1
1/2
00
2
11
/11
/20
02
2/1
1/2
00
3
5/1
1/2
00
3
8/1
1/2
00
3
11
/11
/20
03
2/1
1/2
00
4
5/1
1/2
00
4
8/1
1/2
00
4
11
/11
/20
04
2/1
1/2
00
5
5/1
1/2
00
5
8/1
1/2
00
5
11
/11
/20
05
2/1
1/2
00
6
5/1
1/2
00
6
8/1
1/2
00
6
11
/11
/20
06
Date
Sh
ares
Control Totals: Comfort or No Comfort at All?
Randomly Selected Grants Increased by Random Number
0
20000
40000
60000
80000
100000
120000
140000
2/1
1/1
99
9
5/1
1/1
99
9
8/1
1/1
99
9
11
/11
/19
99
2/1
1/2
00
0
5/1
1/2
00
0
8/1
1/2
00
0
11
/11
/20
00
2/1
1/2
00
1
5/1
1/2
00
1
8/1
1/2
00
1
11
/11
/20
01
2/1
1/2
00
2
5/1
1/2
00
2
8/1
1/2
00
2
11
/11
/20
02
2/1
1/2
00
3
5/1
1/2
00
3
8/1
1/2
00
3
11
/11
/20
03
2/1
1/2
00
4
5/1
1/2
00
4
8/1
1/2
00
4
11
/11
/20
04
2/1
1/2
00
5
5/1
1/2
00
5
8/1
1/2
00
5
11
/11
/20
05
2/1
1/2
00
6
5/1
1/2
00
6
8/1
1/2
00
6
11
/11
/20
06
2/1
1/2
00
7
Date
Sh
ares
Control Totals: Comfort or No Comfort at All?
Grant Date Increased by One Month
0
20000
40000
60000
80000
100000
120000
140000
3/1
1/1
99
9
6/1
1/1
99
9
9/1
1/1
99
9
12
/11
/19
99
3/1
1/2
00
0
6/1
1/2
00
0
9/1
1/2
00
0
12
/11
/20
00
3/1
1/2
00
1
6/1
1/2
00
1
9/1
1/2
00
1
12
/11
/20
01
3/1
1/2
00
2
6/1
1/2
00
2
9/1
1/2
00
2
12
/11
/20
02
3/1
1/2
00
3
6/1
1/2
00
3
9/1
1/2
00
3
12
/11
/20
03
3/1
1/2
00
4
6/1
1/2
00
4
9/1
1/2
00
4
12
/11
/20
04
3/1
1/2
00
5
6/1
1/2
00
5
9/1
1/2
00
5
12
/11
/20
05
3/1
1/2
00
6
6/1
1/2
00
6
9/1
1/2
00
6
12
/11
/20
06
Date
Sh
are
s
Control Totals: Comfort or No Comfort at All?
Original Grant Prices Over Time
0
10
20
30
40
50
60
7/24/1998 12/6/1999 4/19/2001 9/1/2002 1/14/2004 5/28/2005 10/10/2006 2/22/2008
Date
Pri
ce
Control Totals: Comfort or No Comfort at All?
Randomly Selected Prices Modified by Random Multiplier
0
10
20
30
40
50
60
7/24/1998 12/6/1999 4/19/2001 9/1/2002 1/14/2004 5/28/2005 10/10/2006 2/22/2008
Date
Pri
ce
Control Totals: Comfort or No Comfort at All?
Original Price Multiplied by Ten (off by decimal place)
0
100
200
300
400
500
600
7/24/1998 12/6/1999 4/19/2001 9/1/2002 1/14/2004 5/28/2005 10/10/2006 2/22/2008
Date
Pri
ce
ESO Data as a Distribution
Distribution: Shares * Grant Price
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
2/11
/199
9
5/11
/199
9
8/11
/199
9
11/1
1/19
99
2/11
/200
0
5/11
/200
0
8/11
/200
0
11/1
1/20
00
2/11
/200
1
5/11
/200
1
8/11
/200
1
11/1
1/20
01
2/11
/200
2
5/11
/200
2
8/11
/200
2
11/1
1/20
02
2/11
/200
3
5/11
/200
3
8/11
/200
3
11/1
1/20
03
2/11
/200
4
5/11
/200
4
8/11
/200
4
11/1
1/20
04
2/11
/200
5
5/11
/200
5
8/11
/200
5
11/1
1/20
05
2/11
/200
6
5/11
/200
6
8/11
/200
6
11/1
1/20
06
Date
Co
mp
os
ite
Nu
mb
er
ESO Data as a Distribution
• Employee stock option data should be viewed as a distribution over time
• Creating composite numbers (e.g. shares * price) helps to quickly ensure two data sets are identical
• Distributions should be evaluated in tandem with control totals
ESO Data as a Distribution
• Distributions have key statistics that are easy (with a computer) to calculate and verify between two data sets• Mean • Standard Deviation
• Verifying that the Mean, Std Dev, and control totals are identical does not guarantee congruence, but much better likelihood than control totals alone
ESO Data as a Distribution
• Key Distributions to Verify• Shares Granted x Grant Date FMV• Shares Granted x Option Value• Shares Exercised x Exercise Date FMV• Shares Disposed x Sale Price• Shares Cancelled
• Distributions can be broken down by plan, option type, subsidiary...any classification that makes sense for your company
Reporting
FAS 123R Implications of a Service Provider Change
Explanation of the Issue
FAS 123R – Challenge
with Change
• If a new system has a different algorithm for any FAS 123R calculation, this is technically a change in accounting practice and should require a restatement of prior periods• If this was rigidly enforced, audit firms would
have a mutiny on their hands because companies change vendors all the time
• The key is to understand the differences and be able to make a reasonable assessment of the change, which can be easily explained to your auditor
• Large (material) differences may require a restatement
FAS 123R Implications
• Factors that differ between various accounting systems (Expense)• Application of forfeiture rate (in order of
complexity)• Static Method• Dynamic Method
• Backing out forfeitures• Immediate vs. at vest
FAS 123R Implications
(Cont.)
• Application of accelerated (FIN 28) method of expense for grants with monthly vesting
• If you are aware of this in advance, a fix can be made to your data during the conversion such that this is a non-issue
• Straight-Line Expense• How are special cases where more options
have vested than would be expensed under a standard straight-line expense handled?
• All of these have significant downstream effects on deferred tax entries
Application of Forfeiture
Rate
• Where are the greatest effects seen?• Long cliff vesting options• Later tranches of periodically vesting options
• What factors affect the percent difference between systems?• Length of time options vest (longer: > % diff)• Forfeiture rate used (higher: > % diff)• Length of time reporting on old system (longer:
> % diff)• Would a change in methodology technically
constitute a change in accounting practice? Yes.
• Is it reasonable to take an adjustment without restating? Yes. (You would take this expense in the future anyway)
Backing Out Forfeitures
• Where are the greatest effects seen?• Long cliff vesting options• Periodic vesting options with accelerated expensing• Companies with estimated forfeiture rates significantly
different from actual experience
• What factors affect the percent difference between systems?• Length of time options vest (longer: > % diff)• Diff between est. and act. (higher: > % diff)• Length of time reporting on old system (longer: > %
diff)
• Would a change in methodology technically constitute a change in accounting practice? Yes.
• Is it reasonable to take an adjustment without restating? Depends.
Application of FIN 28
Expense for Periodically
Vesting Options
• Where are the greatest effects seen?• Monthly vesting options• Specific to one vendor in the US – grandfathered
problem. Does not affect grants post FAS 123R.• What factors affect the percent difference between
systems?• Length of Periodic Vesting (shorter: > % diff)
• Monthly vesting options could be as much as 6% different
• Length of time reporting on old system (longer: < % diff)
• Number of options outstanding expensed using old method (affects deferred tax)
• Would a change in methodology technically constitute a change in accounting practice? Yes.
• Is it reasonable to take an adjustment without restating? Depends. N.B. even if no expense differences exist, there could be downstream effects to deferred tax
Application of S-L Expense
• Where are the greatest effects seen?• Front-loaded vesting options• Erratic vesting options (breaks the straight-line
somewhere in the middle)
• What factors affect the percent difference between systems?• How front-loaded are the options (More: > % diff)• Is the vesting erratic?
• Would a change in methodology technically constitute a change in accounting practice? Yes.
• Is it reasonable to take an adjustment without restating? Depends. N.B. even if no expense differences exist, there could be downstream effects to deferred tax
Reporting #2
FAS 123R Implications of a Service Provider Change
Solutions
Options Available
When Differences
Exist
• The “R” word – Restate• Least palatable for everyone involved• A “non-option” at most companies
• Run dual systems• Finish old grants on old system, run new
grants on new system• Keep in mind that for deferred tax this
will have to be done until there are no outstanding options for the old grants – could last as long as 10 years
• Other risks: SOX, Cost of two vendors, Time, Etc.
Options Available
When Differences Exist (Cont.)
• Make a one-time adjustment• Probably the most palatable option• Can you get auditor approval?• How material is the difference?• Can the difference be isolated and explained?• Can future differences be accurately
forecasted?
• Amortize the adjustment over a fixed period• Can you get auditor approval?• What affect will amortized adjustment have into
the future?• Is the amortized adjustment material?
Options Available
When Differences Exist (Cont.)
• Ignore the problem, just use the new system• You could do this, but you do so at your own risk• Any auditor with a pulse should catch this during
audit• With all the scandal in stock compensation (e.g.
backdating), do you really want to do this?
• Truly understand ALL differences• Have someone on your side that understands,
at a very technical level, each difference
Creating an Auditable
Explanation
• For each difference, walk through the following:• Difference to FAS 123 calculations (if applicable)• Difference in prior period FAS 123R calculations
(cover both expense and deferred tax)• Anticipated difference in future period FAS 123R
calculations (again, exp. & DT)
• Document your argument• Cite FAS 123R and SAB 107 superfluously if at
all possible• Explain why your solution fits the spirit, if not the
letter, of FAS 123R• Cite other companies that have used the same
solution when possible
Key migration elements
• Data √• Reconciliation √• Reporting (FAS123R/IASB) √• Processes• Audit• Reporting (operational)• Communication
Processes
Redesigning and simplifying processes
Key migration elements
• Processes• Fund flows• Share flows• Escalation process• Data change process• Insider process• Expat process
Audit
Steering clear of pitfalls and corporate hurdles
Key migration elements
• Audit• Audit requirements• Migration controls• Changes in the operational processes
Reporting
Ensuring that key internal business processes continue
Key migration elements
• Reporting• Operational requirements• System requirements• Standardization
Communications
Avoiding assumptions, misunderstandings and confusions
Key migration elements
• Communications • Notifications• Losses & gains• Website (internal/external)• Employee guidebooks (migration packs)• Ex-employees!!
Questions and Answer
Thank you for your time!
If you have any questions or comments, please contact either of us at:
Brock Benson
Prash Shukla