Generating the Forfeiture Rate Report

When a company issues equity awards to their employees, ASC 718 requires that the company apply a reasonable forfeiture rate to properly accrue stock-based compensation expenses. Experts established various ways to determine forfeiture rates. Some forfeiture rates are applied annually, semi-annually, and some are applied quarterly. Regardless of the application, developing a reliable forfeiture rate requires professional judgment based on historical data and what the company expects to see in the future. 

To comply with the guidance, Carta’s SBC expense reports utilize a forfeiture rate to account for the percentage of shares the company expects will never vest and, therefore, will not record expense[1].

This means that entities must come up with a way to predict or estimate future forfeitures. Carta helps companies solve this problem by providing a forfeiture rate report which collects historical information regarding awards issued, terminated, and forfeited. You can find the forfeiture rate report under Capitalization >> Reports if you are a private company and under Reports if you are a public company.

Once here, scroll down to the Equity Plan Analysis section and locate the Forfeiture report

You will be asked to enter the date you would like the data pulled as of or you can leave this defaulted to today's date. If you use the defaulted date as today, this means you would like Carta to export the data for all awards issued and updated as of today's date. The excel export will allow you to enter in start and end dates later.

The next step will be to click the green export button. When the report is finished generating, it will appear in your download's folder and a green notification will appear in the top right hand corner of the page prompting you to download your report.

Once downloaded, you can open the excel report. The three dates you may want to update are highlighted in green.

Both Start Date and End Date should outline the period that you feel is the most indicative of future forfeitures. Once populated, the data being used in the calculation will only cover grants issued within this period. 

As of Date is the date from which the data is to be analyzed. This would generally be today's date but can also be a past date, no earlier than the End Date. If you are looking to be able to use awards granted and/or forfeited up until today's date, then we'd recommend using today's date as the As of Date.

Once all dates are populated, you will see a recommended forfeiture rate populate in the red row under the column labeled Annualized Forfeiture Rate.  This can be inserted into the applicable years within the Create a new report modal and then you can click Generate Reports.

Note that forfeiture rate is a forward-looking projection and company historical data may not always be indicative of future forfeitures. The best practice is to supplement the calculated forfeiture rate with known future business events and professional judgment and adjust the forfeiture rate accordingly.

**We recommend that you save all Forfeiture Rate spreadsheets after you are finished using them to provide audit support and justification for your use of that specified value/rate. These values can be changed if you add, modify, or terminate a historical grant so it is important to keep a copy of the specific report used to estimate the forfeiture rate. 

[1] Recall that ASC 718-10-55-30 states the following:

Thus, compensation cost is recorded alongside when shares vest. For option grants that terminate prior to vesting, no compensation cost will be recorded and any historically recognized compensation cost associated with that award will be reversed in the period during which the grant was terminated unvested. 

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