David Outlaw, CEP
Managing Director, Valuation & HR Advisory Services
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But with those benefits come some unique considerations.
First, there are a dozen ways to architect an ESPP. The program terms, along with the way the program is communicated, can have a significant impact on participation rates, market competitiveness, and cost.
Administering an ESPP is often more complex than a normal stock plan. This includes tracking activity such as enrollments, purchases, and terminations. Future purchases must be estimated, then reconciled with actual purchases.
Then there’s keeping up with the numerous modifications available through an ESPP program. These include percent contribution changes and rollovers, both of which trigger ASC 718 modification accounting.
Even so, an effective ESPP program can be a game-changer. The key is to not let complexity get in the way. We can assist with the entire ESPP development lifecycle, from upfront design to downstream accounting.
ESPP Design
We can help you:
- Explain the different ESPP program varieties, including pros and cons regarding participant impact, administration complexity, and financial statement cost and dilution
- Model the financial statement implications of alternative design options, flexing key variables such as participation rate, future stock prices, and contribution levels
- Model different plan designs in different countries and layer in actual payroll data to improve forecasting precision
- Identify non-qualified ESPPs that offer more lucrative features, potentially focusing on key levels of management
- Value ESPPs by running a Black-Scholes valuation on any call and put features present
- Craft communication materials to help educate employees on the program functionality and how to participate
End-to-End Financial Reporting
We handle all aspects of the ASC 718 accounting for an ESPP. This includes:
Database Development
- Create awards for each plan participant at inception
- Create withdrawals and forfeitures using HR termination data
- Look back over varying time periods to estimate each participant’s contribution going forward
Change Management
- Convert purchases into exercises
- Convert terminations/withdrawals into cancellations and calculate the necessary reversals
- Track prices and determine whether a modification has been triggered
- Manage contribution rate changes, resets, and rollovers
- Determine the cumulative expense impact of modifications
Financial Reporting
- Calculate all expense, EPS, tax disqualifying disposition, and related financial statement values based on the granular reporting process developed
- Create journal entries to streamline reporting
- Calculate the true-up component for actual shares purchased compared with the previous estimate
- Calculate dilution based on modification considerations including rollovers and resets
- Calculate shortfalls resulting from disqualifying disposition events
- Calculate any incremental cost from modifications and include it in reporting going forward
- Support financial reporting for international ESPPs
- Provide audit support, including help with answering their questions about the ESPP
- Develop granular forecasts of future period expense and EPS, flexing these forecasts for various participation rate, design, and stock price scenarios
Examples of Our Work
We provide end-to-end ESPP support to many of the most prominent Silicon Valley ESPP granters in addition to other companies spanning all other industries.
- A medical device manufacturer’s ESPP had a different plan design for UK and US employees. The company also had a phantom (cash) plan for countries where stock could not be issued, and still another plan for the rest of the world. We provided guidance on the different accounting treatments for each plan. Then we developed an automated process to support ongoing expense, EPS dilution, and tax reporting for all our client’s plans.
- At this software company, the ESPP allowed unlimited contribution changes on top of a reset/rollover feature. The company used a spreadsheet to keep track of these modifications—an approach that was labor-intensive and prone to error. We replaced the spreadsheet with a customized, automated process that determines which of these contribution changes would trigger modification accounting and determines the incremental cost related to any resets and rollovers. We also set up a quarterly report showing all the changes employees made to their ongoing elections. For audit and control purposes, the report also highlights the changes that are modifications that will flow through to the other financial reports.
- A global ecommerce corporation expected a change in their stock price that would trigger a reset/rollover in their ESPP. We helped the company forecast what the incremental cost from the rollover would be. We also provided slide decks that concisely, and in plain language, explained the accounting behind the incremental cost along with the expected impact. Our client used these slides to discuss the impact with upper management, their FP&A team, and other stakeholders within the company.
- This multinational maker of computer systems needed to know how future ESPP expense would be allocated to different cost centers within the organization. We created a quarterly report that forecast employee-level expense and EPS dilution three years into the future. Each report factored in current enrollees, projected salary increases (increasing expected contributions), and expected new hires each quarter. Later, we layered in additional forecast scenarios to help answer questions like, “What if we increase the maximum contribution percentage?” “What if there’s a reset/rollover in six months?” and “What would our cost be if everyone enrolled at the maximum percentage allowed by the plan?” We modeled all these different scenarios at an employee level so that the client could do in-depth analysis and look at different cost centers as needed.
