Accounting for Stock-Based Compensation Plans

This chapter provides an overview of the accounting features for stock-based compensation plans and discusses how to:

• Specify your organization's financial accounting standard.

• Select FAS 123 values for stock purchase plans.

• Create option groups.

• Process retirement eligibility.

• Collect data for the Valuation process.

• Create a valuation ID.

• Value stock options.

• Value stock purchases.

• Identify missing valuation records.

Understanding Accounting Features for Stock-Based Compensation

This section provides overviews of the system-supported standards for reporting equity-based compensation and the setup steps for complying with FAS 123.

Supported Accounting Standards

Under FAS 123, companies that offer equity-based compensation plans must report the fair value of plan-related compensation in their financial disclosure statements. Stock Administration provides the tools and reports that you need to comply with these requirements.

The system supports two standards for reporting the value of equity-based compensation:

• FAS 123, which specifies that companies must report the fair value of stock options and stock purchases as of their grant dates.

• APB 25, under which companies can report the intrinsic value of equity-based compensation.

  Companies that comply with APB 25 must still make pro forma disclosures of net income and, if publicly traded, earnings-per-share, as though they had adopted FAS 123.

PeopleSoft Stock Administration uses the widely-accepted Black-Scholes option pricing model to calculate the fair value of stock options and stock purchases granted within the system. Black-Scholes uses six inputs in its valuation calculation. Four of these inputs are stored in the system or can be estimated by running reports that gather and calculate historical data.

Setup Steps for FAS 123 Compliance

To prepare Stock Administration to perform stock option and stock purchase valuations:

1. Select the accounting standard (FAS 123 or APB 25) by which your company discloses the equity compensation on its financial statements

2. Select a valuation plan type (stock purchase plans only).

3. Create option groups (stock options only).

Selecting a Financial Accounting Standard

This section discusses how to select your company's accounting standard for reporting equity compensation on financial statements.

When you make the selection, also enter the disclosure date. If you select FAS 123, identify the year in which you adopted the standard.

Note. FAS 123 regulations state that if your company adheres to APB 25 and then adopts FAS 123, you cannot revert to APB 25 at a later time.

Page Used to Select a Financial Accounting Standard

See Also

Setting Up Stock Rules

Selecting FAS 123 Values for Stock Purchase Plans

This section lists the pages that you use to select FAS 123 values for stock purchase plans.

A valuation plan type determines how the share value is calculated for a stock purchase plan offering. Each stock purchase plan can be associated with one valuation plan type. Valuation plan types range from Plan Type A to Plan Type I, and their definitions can be found in FASB statement 123.

Pages Used to Select FAS 123 Values for a Stock Purchase Plan

See Also

Defining Stock Purchase Plan Rules

Creating Option Groups

To create option groups, use the Option Group Security (ST_GROUP_FIELD_SEC) component.

This section provides an overview of option group setup and discusses how to:

• Define option group security.

• Define selection criteria for option groups.

Option Group Setup

An option group is a group of active grants that are to be valued similarly, for example, grants with the same expected life or grants issued to members who have like exercise patterns, such as executives.

You create option groups by defining the set of criteria the system uses to select the grants to be valued. You can base your selection criteria on data contained in the following records: PERSON, PERS_DATA_EFFDT, PER_ORG_ASGN, JOB, ST_INSIDER_TBL, ST_GRANT, ST_GRANT_VEST, ST_GRANT_EXER.

Because some of these records contain sensitive data, such as compensation rates and birth dates, you can prevent users within specific permission lists from including certain records and fields in their selection criteria.

To define option groups:

1. Define security for option groups.

   Identify the records and fields that are available to users when creating and viewing option groups. This step is typically performed during system implementation.

2. Define the selection criteria for including options in the same group for valuation purposes.

3. Save the selection criteria.

Note. Once you create a group ID, you cannot delete it online.

See Also

PeopleTools 8.52: Security Administration PeopleBook

Pages Used to Set Up Option Groups

Defining Option Group Security

Access the Option Group Security page for a given row security permission list (Set Up HRMS, Product Related, Stock, Option Plans, Option Group Security).

You can limit access to the following eight records, depending on your row security permission list: PERSON, PERS_DATA_EFFDT, PER_ORG_ASGN, JOB, ST_INSIDER_TBL, ST_GRANT, ST_GRANT_VEST, ST_GRANT_EXER.

Record Field Accessibility

Defining Selection Criteria for Option Groups

Access the Define Option Group - Selection Criteria page using a unique group ID (Stock, Valuation, Define Option Group, Selection Criteria).

Select Parameters

Use this group box to define the selection criteria for adding options to the group. The system uses the criteria that you enter to generate the WHERE clause of a SQL select statement. The WHERE clause can contain up to 254 characters.

To add more than one row, save after you add each row. Adding a new row when an unsaved row exists causes the system to assign the same sequence number to both rows, which prevents you from saving.

Prompts with Dependencies

In some cases, the Group Criteria Value field on the Selection Criteria page does not provide a list of valid values to choose from. This is because the field name you selected, by itself, does not give the system enough information to retrieve the appropriate set of values. That is, the values for the selected field are dependent on the values for one or more other fields.

The following table lists the fields whose values are dependent on other fields. While you can type a value for any of these fields in the Group Criteria Value field, the system may not return the results you expect, if the value you enter is not unique.

Processing Retirement Eligibility

This section provides an overview of retirement eligibility and discusses how to process retirement eligibility.

Understanding Retirement Eligibility

When you account for stock options, the valuation expense is distributed over the service period or vesting period of the option. However, if the optionee is eligible for retirement and the plan specifies that the options vest immediately upon retirement, then the service period ends as of the retirement eligibility date, and the remaining expense is due at that time. In this case, the total valuation expense is spread over the time from the grant date through the date of retirement eligibility.

The Stock – Retirement Eligibility (ST_RET_ELIG) Application Engine process determines which grants have met the retirement eligibility criteria or forecast eligibility criteria that you defined for the stock plan. The process evaluates each active grant in the system beginning on the grant date or the agreement date (depending on how you set up the stock option plan). Grants continue to be evaluated until the option either completely vests or expires.

For each grant being evaluated, the system compares the optionee's age and length of service with the retirement eligibility requirements and forecast eligibility requirements. When an optionee meets the eligibility criteria, the process updates the Retirement Eligible check box, the Retire Eligible Dt field, and the Forecast Retirement Eligible check box on the Maintain Grants - General page. Optionees are eligible for retirement when they meet either the normal retirement or early retirement conditions.

Note. You should process retirement eligibility daily. When an optionee becomes eligible for retirement, the Stock Option Valuation Expense Report (STFS007) processing changes. Even though the optionee has not actually retired, the expense is still accelerated and expense realized from the date of grant to the date of eligibility.

Vesting schedules are not modified when optionees become eligible for retirement; vesting modifications occur only when the optionee actually retires, and is part of the integration with PeopleSoft HR.

See Also

Defining General Rules for a Stock Option Plan

Entering, Updating, and Viewing the Basic Parameters of a Grant

Page Used to Process Retirement Eligibility

Processing Retirement Eligibility

Access the Process Retirement Eligibility page (Stock, Valuation, Process Retirement Eligibility, Process Retirement Eligibility).

Collecting Data for the Valuation Process

To collect data for the valuation process, use the Estimate Table (ST_ESTIMATE) and Valuation (ST_VALUATION) components.

This section provides overviews of the data that is required to run the Valuation process and the steps for collecting and entering valuation data, and discusses how to:

• Run the Expected Life Years Analysis report.

• Run the Expected Volatility report.

• Enter variables for valuing stock options.

Data Required for the Valuation Process

The Valuation process, which uses the Black-Scholes Option Pricing model, requires six variables. Two of the variables are already stored in the system, two you can derive from system-generated reports, and the remaining two you acquire from outside sources. The variables and their sources are as follows:

Steps for Collecting and Entering Valuation Data

To collect and enter report data for the Valuation process:

1. Run the Expected Life Years Analysis report.

   This report helps you determine the expected life years for the Black-Scholes model. The expected remaining life of an option is the length of time before the optionee is expected to exercise the option in full. The report calculates the weighted average expected remaining life for the outstanding shares of the option. The system uses prior exercise information for a designated group of options plus other parameters that you enter to produce the Expected Life Years Analysis report.

2. Run the Expected Volatility report.

   The Expected Volatility report helps you estimate the future volatility of a stock by calculating volatility based on historical stock prices entered through the Maintain Daily Prices page. It analyzes price movements over periods of months, weeks, days, or some other frequency that you choose and can serve as a benchmark from which you can project the expected stock volatility.

3. Enter variables on the Estimate Table page.

   Use the Estimate Table page to create an Estimate ID and to record the expected volatility rates, risk-free interest rates, and expected dividend rates that you want the Black-Scholes Pricing Model to use when it values your stock options.

Pages Used to Collect Data for the Valuation Process

Running the Expected Life Years Analysis Report

Access the Expected Life Years Analysis page (Stock, Valuation, Expected Life Years Analysis).

Note. The Expected Life Years Analysis report does not include stock options that are cancelled or that allow exercise before vesting. Additionally, options included in the report must have at least one active exercise.

Include Grants

Enter selection criteria in the Include Grants group box and click the Refresh Group button. The grants that meet your selection criteria appear in the Grant(s) to be Processed group box. You can add or remove individual grants from this list.

To be included in the report calculation, a grant must be active and have at least one active exercise record.

See Also

Delivered Workflow for Stock Administration

Running the Expected Volatility Report

Access the Expected Volatility Report page (Stock, Valuation, Expected Volatility Report).

See Also

Delivered Workflow for Stock Administration

Entering Variables for Valuing Stock Options

Access the Estimate Table page (Set Up HRMS, Product Related, Stock, Stock Rules, Estimate Table).

Enter a separate row of variables for each year up to the maximum expected life years of the options. For example, if the maximum expected life years for any option is 8.5, enter nine rows of data in the estimate table.

Important! Once an Estimate ID is used in a confirmed valuation, you cannot modify data in that estimate.

Note. To value a group of restricted stock options or options that can be exercised before they are vested, create an Estimate ID and enter zeros for all of the estimated values. Enter zero for the expected life years when you launch the valuation process.

See Also

Stock Administration Reports

Creating a Valuation ID

This section provides an overview of valuation IDs and discusses how to create a valuation ID.

Valuation IDs

A valuation ID links together:

• The stock that you want to value (Stock ID).

• The valuation method (single or multiple).

• The estimate ID that represents the volatility, interest rate, and dividend rate figures that you entered on the Estimate Table page.

• The volatility type (high, mean, or low) that you deem appropriate for the valuation process.

  Volatility types correspond to the estimate ID's high, mean, and low values.

When you run the Valuation process for stock options or stock purchases, you select the valuation ID that you want the system to use.

Page Used to Create the Valuation ID

Creating the Valuation ID

Access the Valuation Table page (Set Up HRMS, Product Related, Stock, Stock Rules, Valuation Table).

You can modify any entries on this page until you confirm the valuation.

Valuing Stock Options

This section provides an overview of the procedure for running the Process Grant Valuation process (STFS003) and discusses how to:

• Run the Process Grant Valuation process.

• View grant valuations.

• Revalue repriced options.

• Reverse a stock valuation.

Note. The system must have a valuation for all grants issued after the Original Fair Value date that is noted on the Stock Table page. Any grants that do not have a valuation record, are reported on the Valuation Audit report.

Procedure for Running the Process Grant Valuation Process

The Process Grant Valuation process executes the Black-Scholes Pricing model for the grants that you select. You can run the process in preview or confirmation mode.

To run the process:

1. Access the Process Grant Valuation page.

2. Specify the stock ID, valuation ID, and expected life years for the grants to be valued.

3. Indicate whether you want to preview or confirm a valuation.

4. Select the grants to include in the process.

5. Run the process.

Pages Used to Value Stock Options

Running the Process Grant Valuation Process

Access the Process Grant Valuation page (Stock, Valuation, Process Grant Valuation).

Expected Life Years

Enter the expected remaining life that you deem appropriate for the group of options you're valuing. (You can use the Expected Life Year Analysis report to help determine this number.) The figure you enter determines which set of variables the system retrieves from the Estimate Table for use in the Black-Scholes Model. The system rounds up if you enter a number with a decimal that equals or exceeds .50. For example, 3.5 and 3.6 are rounded up to 4. If the Valuation ID represents the multiple valuation method, the Valuation process automatically adds the number you enter in this field to the length of each vesting period. The expected life must extend beyond the first vesting date but cannot extend beyond the last expiration date. For example, assume today is 07/01/2001, the first vesting date is 07/01/2003, and the last expiration date is 07/01/2011. In this case, the expected life years can be between 2 and 10.

Valuation Run Type

GrantType

Include Grants

Enter selection criteria in the Include Grants group box.

Specify the Stock ID, Valuation ID, and expected life years for the grants you want to value and whether you want to preview or confirm a valuation.

Viewing Grant Valuations

Access the Maintain Grants - Valuation page (Stock, Grants, Maintain Grants, Valuation).

Note. When you use the multiple valuation method to value grants, the values on this page reflect the weighted averages for the grant.

Revaluing Repriced Options

You can revalue grants after the initial valuation; but only if the revaluation is due to repricing, that is, the original grant has been cancelled and reissued. (A reprice grant number must appear for the new grant on the Maintain Grants - Miscellaneous page.)

You must use the same valuation method (single or multiple) to value the repriced grants; however you do not need to use the same Valuation ID.

To revalue the options, run the Process Grant Valuation process for the new grants. The system automatically revalues the cancelled grant, if the new grant is linked to the cancelled grant via the reprice grant number.

Reversing a Stock Valuation

Access the Reverse Grant Valuation page (Stock, Valuation, Reverse Grant Valuation).

To unconfirm valuations for grants that have been previously valued:

1. Specify the Stock ID.

2. Select the grants for which you want to reverse the valuation process by entering selection criteria in the Include Grant Valuations group box.

3. Click the Refresh Group button.

   The grants that meet your selection criteria appear in the Grant(s) to be Processed group box. You can add or remove individual grants from this list.

4. Click Run.

Valuing Stock Purchases

This section provides an overview of the procedures for the stock purchase valuation process and discusses how to:

• Produce the Estimate Contributions report.

• Calculate the valuation of a stock offering.

Valuation Procedure for Stock Purchases

For stock purchases, the system estimates the fair value of the entire offering based on the fair market value of the stock on the offering begin date or the first grant date.

To value stock purchases:

1. Produce the Estimate Contributions report.

   The Estimate Contributions report calculates the actual contributions for a stock offering.

   For each employee associated with the stock plan and offering ID you select, the report lists the grant date, purchase date, and total actual contributions for confirmed stock purchases. It also reports the total and average contribution for all employees.

   This information helps you estimate future contributions for the stock offering, which you must enter before launching the Valuation process.

2. Run the valuation process to calculate the fair value per share.

   After you estimate contributions for a stock offering, you create an offering ID and launch the online process to value the offering. The system uses the Black-Scholes Model to calculate the value per share for each valuation period. Valuation periods are determined by the valuation method:

   • For the single valuation method, the stock offering is valued as a whole. The valuation period runs from the offering begin date to the offering end date.

   • For the multiple valuation method, the stock offering is valued for each purchase date, and can have more than one valuation period. The valuation period runs from the purchase begin date to the purchase end date.

     Because there is only one valuation for each stock offering, the valuation record is not effective-dated. You cannot revalue stock purchase offerings.

     The value per share is calculated based on the stock purchase plan's valuation plan type.

Pages Used to Value Stock Purchases

Producing the Estimate Contributions Report

Access the Estimate Contributions Report page (Stock, Valuation, Estimate Contributions Report).

See Also

Stock Administration Reports

Calculating the Valuation of a Stock Offering

Access the Create Offering Valuation page (Stock, Valuation, Create Offering Valuation, Create Offering Valuation).

To run the Valuation process for a stock offering:

1. Select the Valuation ID.

2. Enter the estimated contribution for each purchase period.

   The Contribution Worksheet group box lists, for each grant date with an offering, the purchase periods to be processed. At the beginning of an offering, enter the total estimated contributions for each purchase period that is associated with the grant. You can use the Estimate Contributions report to help determine the figures that you enter. The Actual Contributions field displays any actual contributions that have been made for each grant date/purchase period combination that is confirmed.

3. Click the Create Valuation button to begin the process.

   The Valuation Periods group box displays the results of the Valuation process.

Identifying Missing Valuation Records

This section provides an overview of missing valuation records and lists the page that you use to identify missing records.

See Also

Stock Administration Reports

Missing Valuation Records

After you run the valuation process for stock options or stock purchases, generate a Valuation Audit report to identify any missing valuation records.

• For stock options, the report lists all stock options that have no valuation record for the specified valuation method.

• For stock purchases, the report lists all active stock offerings for the selected stock that have no valuation record for the specified valuation method.

Page Used to Identify Missing Valuation Reports

Expensing Stock Options

This section provides overviews of expense option types, estimating forfeitures, and repricing awards and discusses how to run the FAS 123 Option Expense report.

Option Expense Types

In compliance with FAS 123R, PeopleSoft Stock Administration allows you to use four combinations of accounting distribution and valuation methods to expense options:

• Single valuation method with ratable distribution.

• Single valuation method with straight-line distribution.

• Multiple valuation method with ratable distribution.

• Multiple valuation method with straight-line distribution.

Note. PeopleSoft Stock Administration does not support the accelerated attribution method for expensing options.

Estimating Forfeitures

Under FAS 123R, stock option grant expenses must initially be calculated using a forfeiture estimation and the expense recorded must later be reconciled based on actual forfeiture outcomes. When a grant vests, the total of expenses taken over time must be equal to the grant's value. Similarly, if an employee terminates or otherwise forfeits an unvested grant, the total of expenses taken over time must be equal to zero. In every expense period, the expense to date for some grants will be based on a forfeiture estimate, while the expense-to-date for others will not because they reflect vesting and forfeiture events in the period.

The Estimated Annual Forfeiture Rate is used to estimate the annual percentage of currently unvested, granted shares that are expected to be forfeited prior to vesting. The rate can be changed from period to period based on experience and events in order to maintain estimation accuracy. The system assumes that the full estimated forfeiture percentage applies at the beginning of the life of a grant and then decreases towards zero as the grant's vest date approaches in order to accurately calculate the estimated rate.

Expensing Repriced Awards

Under FAS 123R, expenses for repriced shares are calculated using a fixed amount of additional expense.

The incremental cost for repriced awards is the excess, if any, of the fair value of the modified (new) award over the fair value of the original (cancelled) award immediately before its terms are modified. When re-valuing the original award at the cancellation date, the term is based on the remaining original term.

Example

To illustrate how repricing expenses are calculated under FAS 123R for both the original and replacement options, use the example of Worldwide Enterprises Corporation, which grants options having a fair market value of $1,500,000 on January 1, 2007. The options are scheduled to 100% vest on December 31, 2009. Worldwide Enterprises' stock price subsequently declines and by December 31, 2007, the options are underwater. On that date, Worldwide Enterprises reprices the options by canceling them and granting replacement options priced at the current market value of the stock.

The repricing expense for Worldwide Enterprises under FAS 123R are determined as of the date the replacement options are granted and, except for forfeitures, are not adjusted further. Since the repricing occurs one-third of the way through the service period, assume that the company has already recorded $500,000 in expenses to date for the underwater options. Worldwide Enterprises must continue to record the remaining $1,000,000 expense for the underwater options. In addition, the company must determine the incremental expense for the replacement options.

The incremental expense is the difference between the fair market value of the replacement options and the underwater options at the time they are cancelled. In this example, assume that the fair market value of the replacement options is $600,000, and that of the cancelled underwater options is $200,000. The incremental expense is $400,000 ($600,000 - $200,000). Worldwide Enterprises records a total expense of $1,900,000 (the original option expense of $1,500,000 plus the $400,000 incremental expense for the replacement options). Since the company has already recorded $500,000 of the original expense before the repricing, it records an expense of $1,400,000 over the service period of the replacement options.

Page Used to Run the FAS 123 Option Expense Report

Running FAS 123 Expense Reports

Access the FAS 123 Option Expense page (Stock, Valuation, FAS 123 Option Expense).

Start Date and End Date	Enter the beginning date and ending date for the expense period for which the report is to be run. The date will determine which grants are included in the report. The system does not include in the report grants that are fully vested before the start date or grants with a grant date later than the end date. Important! Run separate reports for the period that you use APB 25 as your accounting standard and the period that you use FAS 123 as your accounting standard. Running the report for dates that straddle the two accounting standards does not produce appropriate results.
Expense Type	Select the expense type: Actual Expense, Actual Expense/Proforma Expense, or Proforma Expense.
Suppress Details	Select this check box to limit the fields displayed in the report.
Valuation Method	Select the method used to calculate the value of shares within a grant: Single Method: Uses one valuation for all shares within a grant. Multiple Method: Uses different valuations for each valuation period.
Accounting Distribution	Select the distribution method used to calculate attribution expenses: Straight-Line: The entire grant is expensed in a straight-line fashion. Ratable: Each vesting tranche is expensed in a straight-line fashion, which accelerates expenses.
Estimated Annual Forfeiture Rate	The estimated percentage of shares per year that will likely not vest over the life of the grant.