For those that have been doing this long enough to recall the dark days of the options backdating scandal back in the 2000s, you may also recall that a variety of other equity award granting practices were in the spotlight back in those days, including “spring loading” and “bullet dodging.” Spring loading occurs when a company issues stock options shortly before the release of information that it expects to cause an increase in its stock price, while bullet dodging occurs when a company delays its option awards until after the release of information that it expects to cause a decrease in its stock price.
As Emily notes in the Advisors’ Blog on CompensationStandards.com, after all of these years, the SEC Staff has issued guidance on the proper accounting when an issuer is “spring loading” an option grant. As stated in the SEC’s press release, new Staff Accounting Bulletin No. 120 says that companies estimating the fair value of spring-loaded awards in accordance with ASC Topic 718 “must consider the impact that the material nonpublic information will have upon release.” Here are the main changes that Staff Accounting Bulletin No. 120 makes:
- Amends and replaces the interpretive guidance in Topic 14.D., Certain Assumptions Used in
Valuation Methods. SAB No. 120 states that when companies are granting share-based awards while in possession of MNPI, companies should consider “whether adjustments to the current price of the underlying share or the expected volatility of the price of the underlying share for the expected term of the share-based payment award are appropriate when applying a fair-value-based measurement method to estimate the cost of its share-based payment transactions.”
- Rescinds guidance in Subtopic 14.A., Share-Based Payment Transactions with Nonemployees, noting that ASU 2018-07 made Subtopic 14.A. no longer relevant.
- Edits to the following subtopics to conform to updated GAAP terminology from FASB’s ASC Topic 718 (as updated by FASB’s Accounting Standards Updates): Subtopics 14.B., Transition from Nonpublic to Public Entity Status; 14.C., Valuation Methods; 14.D., Certain Assumptions Used in Valuation Methods; 14.E., FASB ASC Topic 718, Compensation – Stock Compensation, and Certain Redeemable Financial Instruments; 14.F., Classification of Compensation Expense Associated with Share-Based Payment Arrangements; 14.I., Capitalization of Compensation Cost Related to Share-Based Payment Arrangements; and 5.T., Accounting for Expenses or Liabilities Paid by Principal Stockholder(s).
– Dave Lynn