Be accurate, be timely: Cross border equity compensation financial reporting

Equity compensation-related financial reporting can be demanding, particularly for companies that operate across borders. Understanding what’s required and getting it right is vital. We take a look at some key issues.

Financial reporting for equity compensation can be a significant administrative burden, especially when meeting tight deadlines. It’s crucial to stay up-to-date and maintain accurate records. Effective communication and meticulous data management are crucial, especially when dealing with complex elements like share plans and employee movements across jurisdictions.

On a recent episode of the Prosperity at Work podcast, J.P. Morgan Workplace Solutions’ Mayura Arankalle, Executive Director, Financial Reporting joined us to share insights into some of these concerns and how companies can navigate these challenges.

Timing is key

One of the areas that she singles out as essential for companies is meeting deadlines and, arising from that, trying to stay as up-to-date as possible throughout a given reporting period.

“There will usually be tight deadlines around the publication of financial reports, and in order to meet those deadlines, companies need to have all relevant data on hand regarding their share plans. This will include, for example, any new awards granted, the fair valuations done for those awards, and any forfeitures. This all matters because each activity will have a direct impact on expense calculations or on deferred tax calculations or perhaps on the earning per share calculations,” she said.

Mayura emphasized that staying on top of that information will require excellent internal communications between the relevant offices and sections.

“In particular, it is essential to have clear communications between HR and the finance team to ensure the equity grant and activity data flows between them seamlessly and error free. Every company will have their own way of doing it, but it’s about making sure that all relevant data is recorded accurately and in a timely manner,” she said.

Movers and leavers

Mayura highlighted the requirement to be cognizant of the implications around employee’s leaving the company.

“You need to make sure that the termination rules are correctly applied. If there are any shares getting forfeited or accelerated on terminations, that will mean applying a different accounting treatment, and that also needs to accurately reported,” she said.

Companies operating in multiple countries also need to be clear on the potential knock-on effects of employees relocating to another jurisdiction.

“If participants are moving from one country to another, that demographic update needs to be recorded before the close of the relevant reporting period. The issue here isn’t just booking cost in the right cost centre, it can also relate to the settlement type of awards. For example, in China awards are settled in cash which means if a participant moves to China we are looking at a change in the accounting method due to settlement,” she said.

Another reason why this matters for companies is that the accounting standard they operate under will most likely require that they record the cost associated with equity or an equivalent award in the employing subsidiary, e.g. if an employee moves from Country A to Country B, even if they registered for an equity compensation plan in the former, the details will need to be recorded under the subsidiary in the latter for as long as they are based there.

Impact on budgets and tracking costs

Mayura acknowledged that keeping track of all employee movements and local requirements can be tricky, especially for very large companies, but that it serves an important purpose.

“Companies need to record expenses for various purposes – 1) accruals and journal entries; 2) management reports, which could be for the purpose of forecasting, budgeting and to evaluate performance of cost centres. That means it becomes quite important for such companies to track participant movements from one cost centre to another, so that they’re booking the correct expense in the correct cost centre. Tracking employee movements for large multinationals can be a challenge and using some kind of automated system where data can come from HR into the financial reporting system to streamline the activity,” she said.

Mayura reiterated the importance of being on top of the relevant information and embracing technology as part of the effort to do so.

“It’s important to use technology where possible, but the key is that all of this information be recorded in a timely manner. Be clear on the data you need and when it needs to be provided, go through your checks and controls, and make sure you have sufficient time to generate reports,” she said.

What next?

For financial reporting, companies must invest the necessary time and effort and not underestimate the challenge’s magnitude.

J.P. Morgan Workplace Solutions offers dedicated employee equity compensation management software to assist your business in gathering and processing data for financial reporting. Whether you operate in a single location or globally, we can support your reporting needs.

Contact us today to speak to our experienced professionals