Disclosures

Under US GAAP, companies are required to include disclosures in their financial statements that support the stock based compensation expense calculations. Below is a list of disclosures that should be included. There may be additional disclosures that your company will want to disclose and the list may not be all-encompassing for those reporting under IFRS. Please consult with your auditors on these additional items.

Option Rollforward

The option rollforward includes disclosures on the option grants' activity. This can include, but is not limited to, outstanding at the beginning of the year, granted during the year, exercised during the year, canceled during the year, outstanding at the end of the year, and vested during the year. In addition to the option rollforward, the company is required to also disclose the weighted average exercise price, the intrinsic value (also known as the notional value), the weighted average remaining contractual life, and the weighted average fair value for each type of activity. 

Valuation Assumptions

The valuation summary disclosures will includes assumptions used in the valuation model applied to determine the fair value (or calculated value) of the awards issued during the current reporting period. The Carta stock based compensation expensing reports default to the Black-Scholes Option Pricing Models to calculate the fair value of the option grants and disclose the range (high and low) and the weighted average of the expected term, volatility, and the interest rate (also knows as the risk-free rate) assumptions, as well as the calculated fair values. The weighted average disclosures are weighted by the number of shares granted.

Exercise Disclosures

In addition to the above, companies are required to disclose the shares outstanding, weighted average remaining contractual life, shares exercisable, and the weighted average remaining contractual life of shares exercisable for each exercise price. 

Additional Disclosures

The company will need to disclose the total current reporting period expense on the income statement and additional paid in capital on the balance sheet.

Any unrecognized or unamortized expense that is left outstanding will need to be disclosed as well. This number represents the amount of expense the company will record in the future for current outstanding awards. Companies will also want to disclose the estimated time it will take for them to fully expense this unrecognized or unamortized expense. In the Carta SBC expense reports, this is called the WARRP which stands for Weighted Average Remaining Recognition Period.

Using Carta reports, both the unamortized expense and the WARRP disclosure are based on post-forfeiture numbers, meaning they take into account the risk of the shares being forfeited and project the amounts that are expected to vest in the future.

The Weighted Average Remaining Recognition Period calculation is the sum of the Weighted Remaining Recognition Period (WRRP) divided by the sum of the shares that are expected to vest for all shares that have not vested or expired by the end of the reporting period. Whereas the WRRP is equal to the Remaining Service Period multiplied by the shares expected to vest (Shares X FR).

Remaining Service Period is the time remaining (reported in years) until the shares vest and is calculated as follows:

Shares expected to vest is calculated as the shares outstanding in each vesting event multiplied by a term called Expected to Vest.

Whereas Expected to Vest takes into account a dynamic forfeiture rate which allows the forfeiture rate to decrease as the shares get closer to their vest date. Using the dynamic forfeiture rate allows the expense to be accrued such that, at any point in time, the total expense is associated with the shares vested at that particular time. This also allows the Weighted Average Remaining Recognition Period to reflect a time period that more accurately show the future time period commitment.

The Expected to Vest calculation says that if the shares have reached their vest date, then there is a 100% change that they will vest (because they already have). However, if the shares have not reached their vest date, then the forfeiture rate will be applied using a sliding scale that is based on the remaining service period or the remaining time until vest.

Restricted Stock

As restricted stock is valued using the intrinsic valuation method and have much different conditions than option grants, they require their own set of disclosures. For these awards, you will want to disclose the roll-forward which can include unvested at the beginning of the period, granted during the period, canceled during the period, vested during the period, and unvested at the end of the period. Carta reports can also help you with the Weighted Average Fair Value (or intrinsic value) for restricted stock activity during the reporting period.

Other Disclosures

If you are a public company or report under International Financial Reporting Standards (IFRS) you may need to disclose additional items that may not be listed above. Please consult with the audit team for additional required disclosures.

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