SEC Comment Trends on Stock Compensation Disclosures

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2015-2016 SEC
comment letter trends
Stock compensation
Current developments
in SEC reporting
October 2016

Table of contents
A message from Ken Stoler 4
SEC developments 5
Overview 6
SEC comments by topic 8
Disclosure 9
Accounting recognition 11
Valuation 13
About PwC’s people and organization – HR accounting
advisory practice 15

4 Stay informed| SEC comment letter trends | Stock compensation
A message from Ken Stoler
Clients and friends:
Recent changes and ongoing uncertainties in the economic and
regulatory environment continue to add to the inherent challenges in
preparing high-quality annual reports. A continuing key theme emphasized
by the staff of the SEC is the importance of providing information to
investors that is reliable, useful, and transparent, particularly in areas of
significant judgment.
The SEC staff has continued to emphasize the importance of providing
comprehensive and transparent disclosures in filed reports to comply with
current disclosure requirements and to reflect the business risks and
conditions in today’s economic environment. At the same time, the FASB
has issued the last of the major convergence-era projects as well as several
other new standards, and the SEC has continued to focus on rulemaking
activities required by the Dodd-Frank Wall Street Reform and Consumer
Protection Act. All of these activities are expected to significantly affect the
regulatory landscape for years to come.
Disclosure, valuation, and accounting related to employee stock
compensation are complex areas that continue to be a focus for the SEC
staff. We have prepared this publication to assist companies in identifying
and understanding the SEC staff’s current focus areas related to stock
compensation. The information summarized within this publication is
based on comment letters published by the SEC staff between July 1, 2015
and June 30, 2016 related to stock compensation. We have highlighted the
more prevalent issues commented on by the SEC staff and provided
relevant examples of recent comments to aid preparers in ensuring their
disclosures are robust and consistent with the accounting and reporting
guidance for stock compensation.
We hope you find this latest edition of our annual publication of SEC
comment letter trends related to employee stock compensation to be a
useful reference tool as you prepare your annual and quarterly reports.
It may also be helpful in the preparation of an initial public offering.
Please do not hesitate to reach out to your local PwC team or one of the
authors of this publication with questions or if you would like to discuss
in further detail.
Best regards,
Ken Stoler
HR Accounting Advisory Leader

SEC developments
2016 was an eventful year at the SEC as the three
remaining Commissioners and their staff maintained
a busy schedule of activities in the financial reporting
and disclosure arena, with two high visibility areas of
focus being non-GAAP measures and disclosure
effectiveness.
Non-GAAP measures have been an area of SEC
interest for many years, but a December 2015 speech
by SEC Chair Mary Jo White touched off a renewed
public focus. In her remarks, Chair White
acknowledged that non-GAAP measures are allowed
in order to communicate important information, but
she also observed that non-GAAP measures may be a
source of confusion. She posed several questions that
company officials (including audit committees) might
consider asking about the usefulness, prominence,
transparency, and controls surrounding
non-GAAP measures.
Senior SEC officials echoed the chair’s remarks in
speeches throughout the spring, and in May the SEC
staff published a significant update to its non-GAAP
measures interpretive guidance focused on two
principal areas: whether non-GAAP measures might
be misleading and the prominence of their
presentation. The SEC staff provided guidance
relating to the exclusion of normal, recurring, cash
operating expenses from non-GAAP measures; the
use of individually-tailored accounting principles to
compute non-GAAP measures; the disclosure of
certain non-GAAP per-share amounts; and the
calculation and presentation of the income tax effects
of non-GAAP adjustments. They also provided
guidance regarding the placement, ordering,
description, discussion, and styling of non-GAAP
measures in relation to their GAAP counterparts.
In June, Chair White “strongly urged” companies to
carefully consider the new guidance, to revisit their
approach, and to consider appropriate controls. She
also urged audit committees to “carefully oversee
their company’s use of non-GAAP measures and
disclosures.” This is an area of keen interest across
the agency, with activity seen in the Division of
Corporation Finance, the Office of the Chief
Accountant, as well as the Division of Enforcement,
and we expect the focus to continue unabated
into 2017.
Another area of significant attention for the SEC has
been its Disclosure Effectiveness initiative. During
the past year, the SEC has solicited input on:
 the financial-related disclosure requirements in
Regulation S-X of entities other than the
registrant (e.g., acquired businesses, guarantors,
equity investees);
 the disclosure requirements in Regulation S-K
(e.g., business information, risk factors, MD&A),
including the manner of presentation
and delivery;
 the use of hyperlinks to access exhibits; and
 the elimination or modification of numerous SEC
disclosure requirements in light of changes in US
GAAP and IFRS and the evolution of SEC
disclosures since the original rules were adopted.
Some of these initiatives are concept releases, while
others are proposed rules, but taken together they
show the SEC’s continued focus on ensuring their
rules facilitate timely, material disclosure and
efficient access to the information.
While 2016 was a busy year, with the November
elections and the inevitable changes to follow, 2017
will likely bring significant developments. One thing
that is certain is that accounting, financial reporting,
and disclosure will remain top areas of interest at
the SEC.
We hope you find the analysis that follows helpful as
you navigate the upcoming reporting season.
John A. May
SEC Services Leader

Overview
This publication includes an analysis of all comments
made by the SEC staff to registrants published on
the SEC’s website between July 1, 2015 and June 30,
2016 related to employee stock compensation.
We identified 90 comments related to stock
compensation issued during that period, to a
total of 50 companies.
We have the following key observations and
trends regarding the comment letters issued to
these companies:
 78% of the comments related to financial
statement presentation and disclosure
 51% of the comments related to S-1 filings/Draft
Registration Statements (DRS)
 49% of the comments related to disclosure, 27%
related to accounting recognition, and 24%
related to valuation
% of comments by filing section
% of comments by form
18%
78%
4%
MD&A Financial statements Other
51%
39%
6%
2%
2%
S-1 / DRS 10-K 20-F 8-K S-4

 Overall, the comments were issued to a wide
cross-section of industries, with no one industry
representing a significant majority. This is a shift
from a few years ago, when Technology and
Pharma/Life Sciences received nearly 80% of
comments. This shift may be due, in part, to the
overall decline in IPO activity over the past year,
as those industries have represented a large
portion of IPO’s in prior years.
% of comments by industry
Asset
Management, 2%
Banking and
Capital Markets,
12%
Energy, 6%
Entertainment,
Media and
Communications,
16%
Health Services,
4%
Industrial
Products, 6%Pharmaceutical and
Life Sciences, 12%
Power and
Utilities, 10%
Retail and
Consumer, 22%
Technology, 10%

SEC comments by topic
We found that the SEC staff’s comments related
to employee stock compensation fall into three
main categories: disclosure, valuation, and
accounting recognition. The tables below show
this breakdown, as well as further
disaggregation into sub-categories.
% of comments by category
% of comments by sub-category
49%
27%
24%
0%
10%
20%
30%
40%
50%
60%
Disclosure Accounting
Recognition
Valuation
0%
5%
10%
15%
20%
25%
30%
35%
40%
General
Valuation
ExpenseClassification
General
Recognition
TaxAccounting
EarningsPerShare
Equityvs.LiabilityClassification
CheapStock
General
Volatility
Disclosure Accounting Recognition Valuation

Disclosure
Of the 90 stock compensation comments, 44
comments (49%) related to disclosure. Of those,
23% related to disclosure of valuation information.
The FASB’s disclosure objectives for share-based
payment arrangements call for information that
enables users to understand the following:
 The nature and terms of share-based payment
arrangements
 The effect of share-based payment compensation
cost on the income statement
 The methods of estimating fair value of the
share-based payment arrangements granted (or
offered to grant) during the period
 The cash flow effects resulting from share-based
payment arrangements
The SEC staff has consistently commented on the
transparency and completeness of disclosures related
to the valuation of equity compensation.
Sample comments
 Please revise to provide additional information
regarding stock-based compensation as part of
your disclosure regarding critical accounting
estimates. Your revised disclosure should
address the methods that management used to
determine the fair value of your shares and the
nature of the material assumptions involved. In
addition, please describe the extent to which the
related estimates are considered highly complex
and subjective.
 Please revise to include all applicable
disclosures required by ASC 718-10-50. In this
regard, we note that the weighted average grant
date fair value of options granted, and a
description of the relevant assumptions used to
estimate the fair value including expected term,
volatility, dividends, and risk free rate have not
been disclosed.
 Given that estimating the fair value of shares
underlying stock options can be highly complex
and subjective, please tell us your consideration
of disclosing that estimates to determine share-
based compensation are critical accounting
estimates. In any event, in regard to stock
options granted during the past year, please:
disclose whether you obtained a
contemporaneous or retrospective valuation and
whether it was performed by an unrelated
valuation specialist, as defined by the AICPA
Practice Aid "Valuation of Privately-Held-
Company Equity Securities Issued as
Compensation" (the "Practice Aid"); if the
valuation was not performed by an unrelated
valuation specialist, please explain the reasons
why management chose not to obtain one;
disclose (a) the significant factors considered,
assumptions made, and methodologies used in
determining the fair value of the underlying
stock and instruments granted, (b) the
significant factors contributing to the difference
in the fair value determined, either
contemporaneously or retrospectively, between
each grant and equity related issuance, (c)
describe significant intervening events within
the company and changes in assumptions, as
well as weighting and selection of valuation
methodologies employed that explain the
changes in the fair value of the underlying
stock between each grant date, and (d) explain
the difference between the fair value of the
underlying stock as of the most recent
valuation date and the midpoint of your IPO
offering price range.

The SEC staff also continues to focus on equity
compensation disclosures in connection with IPOs.
The SEC’s Financial Reporting Manual (FRM)
highlights that the SEC staff may issue comments
asking companies to explain the reasons for
valuations that appear unusual in an effort to confirm
the appropriate accounting treatment. Responding to
the SEC staff’s comments does not always require
additional disclosure in the MD&A or elsewhere in
the prospectus.
Sample comments
 Tell us the stock price derived as of each grant
date and provide us with a narrative discussing
each significant factor contributing to the
changes in fair value determined, as of the date
of each grant and equity related issuance,
through the estimated IPO price. Include a
description of significant intervening events
within the company and changes in
assumptions, as well as weighting and selection
of valuation methodologies employed that
explain the changes in the fair value of your
common stock. Please continue to provide us
with updates for all equity related transactions
subsequent to this request through the effective
date of the registration statement.
 Explain the difference between the fair value of
the underlying stock as of the most recent
valuation date and the midpoint of your IPO
offering price range.

Accounting recognition
comments (27%) related to accounting
recognition.
While the comments spanned a variety of areas of
stock compensation accounting, the most prevalent
comments related to more complex and judgmental
areas, including expense recognition, tax accounting,
earning per share, and the classification of awards as
equity versus liability.
Sample comments
 You disclose that your forfeiture rate in 2012,
2013, and 2014 is 4.3%, 7.9%, and 8.2%,
respectively, and that actual forfeitures through
December 31, 2014 have not been material. In
this note you state that you adjust for actual
forfeitures in the period in which they occur.
Given the yearly increases in your forfeiture
rate noted above, please explain how you
determine your forfeiture rate (the estimate) as
well as the rate of actual forfeitures in each
period. Please also tell us how you applied FASB
ASC 718-10-35-3 in determining your
compensation cost each period, including how
you revise your estimates for the actual number
of instruments for which the requisite service
period has been rendered.
 We note that award offers that are settleable
in Company shares based upon a future
determinable stock price are classified as a
liability until price is established and resulting
number of shares are known, at which time they
are transferred to equity awards. We also note
that, during the period from April 1, 2015 to
June 30, 2015, upon the share price being
determined, award offers were converted to
cash payments and not transferred to equity
awards as described above.
 Please address the following: 1) tell us and
enhance your disclosure to address the disparity
in your plan description and actual activity
reflected. 2) clarify in your description of the
2006 Incentive Compensation Plan, including
post-corporate reorganization, whether award
offers can be converted to cash payments and
how these awards will continue to be governed
by their existing terms if in connection with the
offering, restricted shares of the Company
granted under the 2006 Plan will convert into
restricted shares of Class B common stock.
A sample comment from the SEC staff related to
deferred tax accounting for equity compensation:
 Please explain to us how you account for
and present excess income tax benefits in
the consolidated statements of stockholders'
equity and cash flows. In addition, please
explain to us why your accounting and
presentation of excess tax benefits and tax
deficiencies comply with ASC 718-740-35-3
through ASC 718-740-35-9 and
ASC 718-740-45-2 through ASC 718-740-45-4.
An inquiry related to the earnings per share
treatment of restricted stock:
 You disclose that dividends are payable in
respect of shares of unvested restricted stock
either at the time the dividend is paid to
stockholders or upon vesting of the restricted
stock in accordance with the terms of the
applicable restricted stock award agreement.
Please tell us in detail whether these unvested
share-based awards are participating securities
in accordance with ASC 260-10-45-61A and
whether your earnings per share should be
calculated under the two-class method in
accordance with ASC 260-10-45-60B.

The SEC staff also addressed non-employee equity
compensation accounting:
 It is unclear why you have not addressed the
applicability of ASC 505-50, Equity Based
Payments to Non Employees to your restricted
common stock sale to a Board Member. Please
provide us with this analysis. If you conclude
that ASC 505-50 is not applicable, provide us a
comprehensive accounting analysis including
reference to the specific paragraphs within the
authoritative literature you relied upon to
substantiate your accounting and address
the following:
– It is unclear from your response how
the promissory note qualified for part
recourse accounting. Describe the factors
you considered when making this
determination including your consideration
of whether the Company's recourse rights
were substantive.
– If you conclude that your original
accounting was appropriate, tell us whether
and how you re-evaluated the original
accounting at the time of the forgiveness.
Specifically address how you considered
whether there was an intention to forgive
the recourse portion of the note when it was
originally issued.
– For the nonrecourse portion of the note that
was accounted for similarly to an option
grant, clarify whether the corresponding
credit was to APIC or a liability.
– Revise your stock based compensation and
common stock valuation discussions in your
MD&A to address the October 19, 2015 loan
forgiveness and related valuation of your
common stock.

Valuation
comments (24%) related to valuation. Of these,
roughly half related specifically to “cheap stock.”
Cheap stock refers to the issuance of equity securities
(e.g., options, warrants, common stock, restricted
stock) during the period preceding an IPO for a value
that is below the expected IPO price. The SEC staff’s
view is that a company’s IPO pricing range is
indicative of the fair value of its stock leading up
to the IPO and they are, therefore, skeptical of
valuations in the 12 months prior to the filing
that are significantly lower than that range.
As disclosed in the SEC’s FRM, the disclosures
regarding valuation should be included as part of
MD&A and should include:
 the methods that management used to determine
the fair value of the company’s shares,
 the nature of the material assumptions involved,
 the extent to which the estimates are considered
highly complex and subjective, and
 the estimates will not be necessary to determine
the fair value of new awards once the underlying
stares begin trading.
Responding to comments issued by the SEC staff may
not require additional disclosures. In some cases, the
SEC staff’s questions about unusual changes in the
stock valuations are intended only to confirm the
appropriateness of the accounting and do not require
expanded disclosures.
As a registrant completes its roadshow and
commences discussion with its underwriters
regarding the estimated offering price range, it is
becoming more common for the registrant to initiate
communication with the SEC staff before receiving a
formal comment. Typically, the registrant sends a
letter describing the valuation of its common stock
leading up the IPO. The letter may include a
quantitative and qualitative analysis explaining the
difference between the estimated offering price and
the fair value of each equity issuance for the
preceding 12 months.
Sample comments
 Please tell us how you measured compensation
expense for these share based payments
including how you determined their estimated
fair values on the date of grant. If the share
options were granted at their estimated fair
values please tell us why there was such a steep
decrease in the estimated fair value of the
underlying shares leading up to the IPO. Also
tell us how the exercise price relates in
comparison to your estimated offering price.
You cite improved capital market conditions for
companies in your industry as a reason for the
increase in fair value, reflected in the estimated
IPO price. Please explain to us why you were
unaware of this information and presumably
did not include it in your September 24, 2013
common stock valuation.
 Please tell us why you interpolated a value for
your February stock repurchase but not for any
of your stock option grants. Please tell us
whether your stock based compensation would
be materially different if you used this approach
to value all of your stock options.
 Once you have an estimated offering price,
please provide us an analysis explaining the
reasons for the differences between recent
valuations of your common stock leading up to
the IPO and the estimated offering price.

A number of comments related to volatility
assumptions used in option valuations:
 You disclose that the expected volatility is based
on the historical volatility of comparable public
companies. As the company has been a public
company since 2010, please tell us why you
believe this methodology is appropriate. In this
regard, please explain to us why you have not
used your historical volatility in estimating
expected volatility for the periods in which you
have sufficient information and tell us when you
intend to do so in the future. We refer you to ASC
718-10-55-37 and question 6 in SAB Topic 14.D.1.
 Please clarify whether you intend to only use
peer group volatility in determining expected
volatility until the company has been publically
traded for ten years. If so, then tell us how that
approach complies with ASC 718-10-55-37 and
SAB Topic 14.D.1.
We note that the expected volatility of your Class
A common stock is based on a peer group in the
industry in which the Company does business.
Please tell us what consideration you gave to
using the Company's historical pricing data in
arriving at a volatility assumption. In addition,
tell us what consideration you gave to disclosing
the reason for the continued reliance on a peer
group in the industry in arriving at this
assumption. We refer you to ASC 718-10-55-37
and SAB Topic 14.D.1.

About PwC’s People and Organization –
HR Accounting Advisory Practice
At PwC, we bring together an unmatched
combination of industry, business, strategy, talent,
HR, analytics, and technology expertise with more
than 11,000 people in 138 countries in PwC’s People
and Organization practice. That means you get the
right team with the right skills and experiences,
wherever you need us round the world to help you
deliver the value you’re looking for – from developing
a people strategy through to organizational
execution.
As part of PwC’s People and Organization practice,
our HR Accounting Advisory practice helps
companies with their accounting and financial
reporting of compensation and reward programs.
Our deep technical expertise in the compensation and
benefits accounting arena can help companies
successfully design employee benefits and
compensation arrangements to align with the overall
strategic objectives of the organization while
navigating through the myriad of financial and
regulatory accounting requirements.
For more information, please contact the authors:
Ken Stoler
Partner
(213) 270-8933
ken.stoler@pwc.com
Teresa Yannacone
Director
(267) 330-1377
teresa.yannacone@pwc.com
Acknowledgements
This publication represents the efforts and ideas of
many individuals within PwC, including members of
the People and Organization practice. The following
PwC personnel contributed to the contents or served
as technical reviewers of this publication:
Matt Foley
Senior Associate
(646) 471-9837
matthew.e.foley@pwc.com
Maureen Gilroy
Senior Associate
(267) 330-2462
maureen.l.gilroy@pwc.com

pwc.com
© 2016 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC
network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. The comment letter data utilized in
the publication was obtained from MyLogIQ, LLC.

SEC Comment Trends on Stock Compensation Disclosures

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