The Advisors' Blog

Three Corp Fin Staffers were guest speakers during the Employee Benefits, Executive Compensation and Section 16 Subcommittee Meeting at the Winter Meeting for the ABA Federal Regulation of Securities Committee last Thursday. During the meeting, they shared thoughts about first-year PvP disclosures.

Jennifer Zepralka, Chief of the Office of Small Business Policy, described the Staff’s review procedure. The team used XBRL tagging to identify disclosures that appeared to be lacking, but once the Staff reviewed those disclosures in full, they discovered the issues were often tagging problems. When disclosures were missing, the Staff focused on forward-looking “fix it” comments rather than inquiries that would start a back-and-forth with the registrant (for example, on topics like how equity was valued for CAP).

The Staff was surprised by the frequency of PvP sections lacking relationship disclosures, noting that some companies said they didn’t include certain relationship disclosures since their compensation committees don’t use or consider net income, for example, even though the rule doesn’t use that standard. The Staff also noted that many companies mistakenly used a broad-based market index, failed to include the CSM in the tabular list or identified two CSMs (or didn’t clearly identify any additional measure presented in the table as supplemental).

Beyond the problems identified in the comment letters, the three Staff members, including accounting folks, also discussed areas where even compliant disclosures could benefit from some improvements in year two. Here are their suggestions:

– Disclosures could be more readable in Plain English and focus more on the information that’s useful to investors
– Poor presentation practices caused meaningful information to be hard to find
– Graphical relationship depictions were generally more effective than narrative discussions
– For companies who used graphs, visual choices mattered — some clearly showed relationships while others obscured the relationships
– While not required by the rule, it’s helpful to identify what index the company chose by footnote or otherwise
– With non-GAAP company-selected measures, the description of how the metric was calculated was sometimes unclear or hard to find
– Footnote disclosure for all years in last year’s table do not need to be repeated next year unless material to an investor’s understanding under CDI 128D.03

Their final tip for improving PvP can be summarized as: “involve your accountants.” The Staff members thought the accounting team was an underutilized resource for first-year PvP disclosures. Here are areas where the accounting team could assist:

– Preparing disclosures, including narrative descriptions, to benefit from their knowledge and expertise in fair value assessments for GAAP purposes
– Determining the CSM (some companies selected metrics that were inconsistent with the definition of “financial performance measure” and the accounting team would have recognized this)
– Ensuring the correct numbers are reported as “net income” (see CDI 128D.08)
– Considering the impact of retirement eligibility and other conditions on equity awards (accountants are already considering for the requisite service period, but note that the treatment of market conditions under GAAP differs from the PvP treatment)
– Assessing the valuation techniques allowable under ASC 718 and crafting disclosure if you are changing your valuation technique as permitted under CDI 128D.20 

– Meredith Ervine