7 Common pitfalls of financial reporting – and how to avoid them

Look before you leap – an old adage that’s especially true when it comes to financial reporting for equity compensation programs, where consequences for carelessness can range from minor inconvenience to major risk to your company. Knowing the hazards, and how to dodge them, is key…

Mind the valuations

One of the fundamentals of equity compensation plan design is deciding whether to grant restricted stock or options. There are complexities around these that you will need to be aware of and you’ll need to involve your accounting team to evaluate the method to calculate fair values of each.

With RSUs, valuation is relatively simple through the use of a closing share price – however stock options require valuation models that can be complex and may need professional outside assistance. This is an additional step many do not anticipate.

Performance metrics can be costly

Making your awards subject to performance conditions: it might make sense from an HR perspective, but it could cost you time and money. The type of performance conditions you set (i.e. market based or non-market based) mean different accounting treatment and valuations models, each with their own implications for admin and expense

The snares around settlement

It’s a fundamental question of equity compensation plan design: are you going to settle in cash or in equity? Before you make that decision you need to be aware that each has a different accounting method. Equity settled awards are fair valued once, on their grant date, while cash settled awards require a re-valuation at every reporting date until settled, meaning an added layer of admin. Be aware that, even in an equity-focused plan, seemingly innocuous features like buyback clauses can result in cash accounting.

Changing plans has a (literal) cost

Change is constant – however, if you modify an award in the middle of its cycle, for example due to repricing, changing the exercise period or performance conditions, this can create unexpected accounting costs and affect your company’s profitability. Before making changes to your plan design, speak to your advisors to understand the accounting implications.

Taking an eye off ‘audit day’

Getting your accounting right is only half the battle – the rest includes the application of checks, appropriate controls, documentation and maintaining an audit trail so you can show auditors relevant information in a ready, digestible format when the time comes. This is where working with an equity compensation administration partner can often be beneficial, especially if they can provide a place to host all your data, provide calculations and track documentation and transparency. Which leads us to…

Relying on Excel

Seek tech solutions now to head off cost and other impacts later: when designing your plan, ensure your accounting team is involved in selecting a partner who can host and manage your data, one who can provide technologies that can meet your plan’s growing needs. If you don’t opt for a full plan admin solution, remember there may be the option to seek out ‘low tech’ tools that lessen your burden and can help to increase visibility and engagement.

Lack of communication

Accounting of stock plans is really about communicating the position of your company’s stock in a dollar value to shareholders. Clear communication between internal departments to ensure accurate and timely reporting of financial numbers is vital. In fact, transparency and collaboration is key at every step of your equity compensation journey. When designing a plan your internal teams need close alignment; when a plan is live, any changes must be communicated smoothly to all stakeholders; during audit your auditors need clarity and cooperation. Talking can help to reduce the number of nasty surprises.

Talk To Us

When it comes to financial reporting companies need to put in the necessary time and effort, and not underestimate the size of the challenge facing them. At J.P. Morgan Workplace Solutions our team of professionals is experienced in providing personalized support to help companies of all sizes around the world with their equity compensation needs. Regardless of the industry you’re in or the company stage you’re at if you would like to find out more then get in touch.