Top Questions for Year-End Stock Compensation Reporting

As year-end reporting gets underway for many companies, we want to address several key questions around equity compensation that only come up (or undergo extra scrutiny) once a year. We’ve organized our questions into five categories. By reviewing this list, you and your team can be better prepared to handle the trickiest reporting elements during the busiest time of the year.

Compensation Expense and Required Disclosures

1. How will performance awards impact compensation expense and be disclosed in the roll-forward tables?

Awards with performance conditions should be assessed at least quarterly and any changes in expected payout should be reflected as a cumulative adjustment to expense. With the benefit of full-year information, year-end expectations should be well documented and supported. Further, management dashboards should highlight any year-over-year or budget-to-actual differences. (Recall that awards with only market conditions don’t have post-grant expense adjustments. And no reversal is made if the final attainment is zero, as long as service is rendered.)

If you’re paying out performance awards above or below target for the first time, consider how these will be disclosed in the 10-K footnote. The treatment for such awards isn’t covered in ASC 718-10-5-2, the stock compensation disclosure guidance.

Many companies will initially disclose performance awards based on the target units, then adjust based on the final payout. When the final payout occurs, we often see the shares paid above target represented as an additional line in the share roll-forward (rather than additional shares granted in the period). For awards paying out below target, this is often represented in one of two ways:

• Add another line in the share roll-forward for target shares not paid out due to underperformance, similar to the common approach for above-target payout
• Include the shares not paid out due to underperformance in the “shares canceled” line of the roll-forward. In this case, it may also be helpful to add a footnote detailing this combination

The benefit of the first approach is congruency in both above-target and below-target scenarios. However, the second approach is common and may be simpler to incorporate, as many stock administration systems will cancel target shares due to underperformance, the same way other awards are canceled.

For a thorough discussion of approaches we see in practice, read our article on 10-K disclosures.

2. Did you have any modifications this year?

Modifications can come in all shapes and sizes, including for a single employee who received special treatment. For any significant modifications made to your awards during the year, you must disclose the terms of the modification, the number of employees impacted, and the total incremental cost. Ensure that all teams, particularly HR, are aware of modification triggers and that there’s a clear process for communicating modifications to the accounting team.

Although the fair value for expensing purposes may have changed due to the modification, the grant-date fair value is generally what ASC 718-10-50-2 requires to be disclosed in the share roll-forward. Tracking different fair values for expense and the footnote disclosure may not be possible in all financial reporting tools, so be sure to review your system’s capabilities. Additionally, any incremental cost from modifications can lead to a hanging deferred tax asset if reversals are made independently using only the grant-date fair value.

Keep in mind that ESPPs may reset and roll over at the end of the year, leading to one flavor of modification. For more information, see our guide on resets and rollovers.

3. Did you experience any corporate transactions this year?

Corporate transactions typically lead to additional complexity in the financials. Focusing on the 10-K footnote, a spin or divestiture will require carving shares out of the existing share roll-forward tables.

For any acquisitions, the number of shares assumed should be added to the share roll-forward. A separate line in the roll-forward for these assumed shares will help keep the table clean and clearly disclose them. However, if the shares aren’t material, you can consider including them in the shares granted line along with a footnote.

For more on assumed awards, please see our checklist of key considerations.

4. Were there any new award types or designs issued?

If a new award type or a new type of performance award was granted during the year, a best practice is to add a new section to your footnote disclosures describing the new awards issued. The disclosure guidance also calls for a separate roll-forward table when the instrument types are sufficiently distinct (e.g., stock options versus full-value shares).

We suggest drafting the language and updating the footnote disclosures template for these awards before the close. That way, it can be reviewed internally and with auditors as appropriate.

Tax Reporting

5. Have you reviewed your 162(m) list?

In evaluating your list of 162(m) covered employees, remember that under the Tax Cuts and Jobs Act of 2017, once an employee is covered by this rule, they’re always covered.

The American Rescue Plan Act (ARPA) of 2021 expanded the list of covered employees to include an additional rotating group of the next five most highly compensated employees, effective for tax years beginning after December 31, 2026. Although the provisions of ARPA aren’t yet in effect, many companies are behind the curve in accounting for the reduced deductibility because awards that will be paid in 2027 or beyond are already expensing.

Get a refresher on 162(m) and what’s changing as a result of ARPA.

6. Does your data cutoff need to be later than other reporting periods?

At year-end, a reconciliation is typically performed between employees’ W-2 income and the actual tax benefit recognized by the company on shares exercised or released. As a result, we sometimes see a later data cutoff in order to ensure all material activity has been captured. This requires increased coordination and planning among various teams to ensure all reporting requirements can be completed within a tighter timeframe.

7. Is there a process in place to ensure FICA taxes are withheld by the end of the year?

FICA taxes must be withheld as soon as a material risk of forfeiture no longer exists. This means that FICA taxes may be due before shares are delivered, particularly for awards with retirement eligibility provisions.

Fortunately, there’s a “rule of administrative convenience” that allows withholding to be batch-processed in the year of the triggering event. This typically occurs in mid-December to capture the vast majority of affected awards, though all transactions must be processed by December 31.

We suggest working with HR to set up a process for FICA taxes to be withheld. That may include payroll deductions over several pay periods or selling shares to cover the taxes as requested by employees.

For an in-depth look at the impact of FICA taxes on equity compensation, please refer to our issue brief.

EPS Dilution

8. Do performance awards now need to be included in the dilution calculations?

As contingently issuable shares, performance-based shares are included in the dilution calculations based on how many shares, if any, would be issued if the end of the financial reporting period were the end of the performance period. Since many performance periods end on December 31, there’s a good chance that some of these will switch to a non-zero amount in Q4 if the actual performance is known and estimable. This quantity of shares should be included in the dilution calculation for the entire reporting period.

See our white paper on dilution for market and performance-based awards for further nuances.

9. Have you taken into account any other complex instruments?

Year-end is a good time to review the treatment of any other complex equity instruments knowing that auditors will also be taking a closer look. Here are some situations we commonly see:

• For time-based restricted shares, if the employee is retirement-eligible to retain some or all unvested shares, those should be added to common shares outstanding for the purpose of calculating Basic EPS
• Awards with nonforfeitable dividends are considered participating securities, which require the use of the two-class method
• ESPPs can generate dilution for the value of shares that will be delivered above the employee’s contributions

See our EPS white paper for more detail on these and other topics.

10. Are you accurately calculating year-to-date dilution and reflecting a net loss?

Year-to-date dilution calculations should be based on an average of the amounts included in each quarterly computation rather than an independent full-year calculation, as required by ASU 260-10-55-3.

In cases of net operating loss, there should be zero incremental shares included in diluted EPS because this would be antidilutive. Using an example where a company has basic EPS of -$1/share, increasing the number of shares for diluted EPS would decrease the negative per-share loss.

Audit and SOC 1 Considerations

11. Have you reevaluated controls specific to year-end, with special consideration for new circumstances this year?

Year-end is a good time to ensure adequate controls are in place and functioning as expected. As you complete the year-end reporting procedures, we suggest taking a look at any new types of activity or awards issued and evaluate whether extra controls are needed. Common high-risk areas include C-suite departures, adoption of new systems or regulations, and corporate transactions. Another risk multiplier is international operations with foreign subsidiaries that trigger new accounting standards and statutory filing requirements.

We also suggest reviewing procedures related to any non-financial disclosures. These areas tend to evolve more frequently and carry risks associated with being less quantitative than traditional financial disclosures.

12. Have you compiled information for the annual valuation disclosures?

Valuations are often completed in the first quarter of the year when annual grants are commonly issued. If not already done, you’ll need to gather supporting documentation on the inputs and methodology used for those valuations.

13. Do you work with any outside vendors to prepare your financial statements?

Be sure that any vendors you work with are covered by a SOC 1 report. Now is a good time to obtain the current SOC report and make sure it doesn’t have any control deficiencies. If the review period doesn’t cover the full fiscal year, you’ll need a bridge letter for the gap period.

Cross-Functional Areas with Compensation

14. Are you prepared for any new regulations?

As if current rules and regulations weren’t enough, changes affecting equity compensation seem to happen all the time. The most complex addition in the past several years is the SEC’s pay vs. performance (PvP) rule. Gathering the necessary data, performing the required calculations, and creating the full disclosure involves close coordination between Finance, Legal, and other teams. For more on the implications, see our article about the SEC’s 2024 PvP comment letters.

On the horizon is expense disaggregation. The FASB released Accounting Standards Update (ASU) No. 2024-03, which requires public business entities to provide disaggregated information about their expenses effective for annual reporting periods beginning after December 15, 2026. Because early adoption is permitted, we may see this new standard in action as soon as December 15, 2025. Now is the time to start getting ready for the new requirements.

Learn more about expense disaggregation here.

15. Has your proxy process been updated in light of any team changes or award changes?

The proxy requires multiple people from various teams to gather all the information. Teams change, so the groups and individuals involved in preparing the proxy should be documented and reviewed before each proxy season. Don’t underestimate the knowledge that may reside within one or two individuals, such as complex calculations like 280(g) golden parachute rules. Ensure that processes are well documented to avoid key person risk.

We also suggest taking special care to consider any modifications or discretionary adjustments made to executive compensation awards during the year. Even if the adjustment wasn’t deemed to require the modification framework within ASC 718, it may need to be discussed in the narrative of the proxy’s compensation and analysis section. A good example is a change in retirement eligibility provisions.

16. Is everything in place for the upcoming annual grant?

We frequently see the busyness around year-end reporting last until it’s time to issue the next annual grant, so it’s helpful to finish as many of those preparations as possible before the new year begins. It’s likely that forecasts will expand to include the upcoming year, which will require inclusion of any proposed award design changes.

Get a checklist to help with such forecasting here.

Wrap-Up

While this is by no means a comprehensive list of everything that may come up during year-end, we hope this helps you prepare and make decisions about some of the more novel and nuanced areas of year-end reporting for equity compensation. If there’s any topic you’d like to discuss further, please feel free to reach out.