The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

November 30, 2021

SEC Issues Accounting Guidance on Spring-Loaded Awards

Yesterday, the SEC’s Office of the Chief Accountant and the Division of Corporate Finance issued guidance – via Staff Accounting Bulletin No. 120 – on how to properly account for “spring-loaded awards” made to executives. Spring-loaded awards are awards granted by a company to an executive shortly before disclosure of material non-public information to which the market is likely to react positively.

As stated in the SEC’s press release, SAB No. 120 says that companies estimating the fair value of spring-loaded awards in accordance with ASC Topic 718 “must consider the impact that the material nonpublic information will have upon release.” Here are the main changes that SAB No. 120 makes:

– Amends and replaces the interpretive guidance in Topic 14.D., Certain Assumptions Used in Valuation Methods. SAB No. 120 states that when companies are granting share-based awards while in possession of MNPI, companies should consider “whether adjustments to the current price of the underlying share or the expected volatility of the price of the underlying share for the expected term of the share-based payment award are appropriate when applying a fair-value-based measurement method to estimate the cost of its share-based payment transactions.”

– Rescinds guidance in Subtopic 14.A., Share-Based Payment Transactions with Nonemployees, noting that ASU 2018-07 made Subtopic 14.A. no longer relevant.

– Edits to the following subtopics to conform to updated GAAP terminology from FASB’s ASC Topic 718 (as updated by FASB’s Accounting Standards Updates): Subtopics 14.B., Transition from Nonpublic to Public Entity Status; 14.C., Valuation Methods; 14.D., Certain Assumptions Used in Valuation Methods; 14.E., FASB ASC Topic 718, Compensation – Stock Compensation, and Certain Redeemable Financial Instruments; 14.F.,  Classification of Compensation Expense Associated with Share-Based Payment Arrangements; 14.I., Capitalization of Compensation Cost Related to Share-Based Payment Arrangements; and 5.T., Accounting for Expenses or Liabilities Paid by Principal Stockholder(s).

This guidance is interesting because the Staff calls out the application of its guidance when companies have positive MNPI. As a result, SAB No. 120 seems to lean towards a concept of “fairness,” which we’ve also seen previously in the say-on-pay / pay ratio context. Make sure this guidance makes it into your internal controls and disclosure checks to avoid any surprises down the road!

– Emily Sacks-Wilner