Page 165 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 4. The Stakeholders 151

For stock-settled awards, fair value is determined on day of grant; for cash-settled
awards, fair value is determined on date of exercise or settlement. Stock-settled valuations are
adjusted to the actual number of shares that vest.
If the company tax deduction exceeds the expense charge, the difference is recorded as
paid-in capital. Conversely, if the tax deduction is less than the expense charge, the difference
is subtracted from paid-in capital.
In 2005, the SEC ruled that the new rules were not effective until the fiscal year begin-
ning after June 15, 2005, which meant that calendar-year companies would begin reporting
with the first quarter of 2006, although some began voluntarily applying the new standard
prior to that date. The same date applies to nonpublic companies.
Emerging Issues Task Force. FASB’s Emerging Issues Task Force (EITF) resolves technical
issues interpreting how existing accounting pronouncements apply to new situations. For
example, it looked at the accounting impact of companies repricing underwater stock options
following the October 1987 crash. Initially it ruled there was no compensation expense if
done once. However, a second repricing would be considered a variable grant and treated as
an SAR for accounting purposes. Later, FASB ruled that even the first repricing would result
in the option being considered a variable grant.
Insider Trading. In addition to overseeing how executive compensation will be reflected in
the company’s financial statements, the SEC also provides restrictions on purchase and sale
of company stock by those with information not available to the general public (i.e., insiders).
Highlights of these are found in the 1934 Securities Exchange Act as amended and directly
related rules adopted by the Commission.
Section 16(a) defines “insiders” and their filing requirements:
• Insiders are those in policy-making positions (such as executives and board members)
and owners of 10 percent or more of the company.
• Insider filing requirements [Forms 1 and 2 are not applicable to 16(a)] include:
– Form 3. Beneficial ownership upon attaining insider status filed within 10 days of
effective date.
– Form 4. Specified changes in beneficial ownership, filed within two business days
of the event.
– Form 5. Annual statement of changes in beneficial ownership not required to be
on Form 4 or corrections on Form 4; filed within 45 days of end of fiscal year.
A copy of each of the three is filed electronically with the SEC, and another is to be
posted on the company website.
Under Rule 144 of the 1933 Securities Act, restricted stock (shares not registered with
the SEC) and control stock (defined as stock owned by person or persons who control the
company directly or indirectly, such as officers, directors, and others) must generally be held
two years before it can be sold. Notice of such an intended sale must be made to the SEC
(on Form 144) when an offer is contemplated. Rules on limitations on amount sold, manner
of sale, availability of public information, reporting requirements, and other issues need to be
carefully reviewed.
Rule 145 from the same act covers the requirements of sale of company stock resulting
from mergers, acquisitions, and other stock issued as the result of stockholder-approved
reorganizations. As with Rule 144, limitations on amount sold, manner of sale, availability of
public information, reporting requirements, and other issues need to be reviewed carefully.