Overview: Pulley’s Stock-Based Compensation (SBC) tool is built to calculate the expensing of share-based compensation for common, “plain-vanilla” type share-based compensation awards according to the Accounting Standards Codification (ASC) 718, Compensation — Stock Compensation issued by the Financial Accounting Standards Board (FASB). This tool can generally support calculations for original (non-modified) grants of common stock, options (ISOs and NSOs), and RSUs/RSAs subject to service vesting conditions only.
Use cases currently not supported:
Grants with performance or market vesting conditions
Grants with modifications or changes made after grant
Accelerated recognition method for expensing
Grants with award repricings
Disclosure calculations for footnotes
Liability classified awards
Share-based payments granted to customers in conjunction with revenue arrangements that are not in exchange for a distinct good or service
Warnings will occur in the report for a specific grant if it’s determined that the grant may need to be treated differently for accounting purposes than how it's currently being treated or if the security is missing pertinent information (i.e. vesting schedule).
The Pulley SBC tool currently supports SBC calculations for service-based vesting incentive
awards (not performance or market based). Pulley’s SBC tool utilizes a Black-Scholes Option Pricing Model to determine the fair value of the options on the grant date. The fair value of an RSU or RSA is estimated as the value of a common share from the 409A in effect at the measurement date. The grant date fair value of the award is expensed over the award’s vesting period using the straight-line attribution methodology. The stock compensation expense is calculated monthly in the report for each grant and thus the report can be used for monthly, quarterly, semi-annual or annual reporting purposes based on selected dates.
The inputs to the Black-Scholes Option Pricing Model are as follows:
Stock Price (S): The price of the company's stock.
Pulley utilizes the value of a common share from the 409a in effect at grant date from the Company’s Pulley profile. Can be updated in the Valuations > 409A screen in Pulley.
Exercise Price (K): The price at which the option holder can buy the stock.
As input to the Pulley platform for the individual award being calculated. Can be edited in the individual award screen in Pulley.
Time to Expiration (T): The time in years until the option expires.
Calculated utilizing the practical expedient for nonpublic entities utilizing the grants vesting schedule and contractual expiration date. Vesting schedule and contractual expiration date can be edited in the individual award screen in Pulley.
Volatility (σ): The expected volatility of the stock's returns.
As input by the entity when running the SBC report or derived from volatilities of the peer companies as input by the entity when running the SBC report. Volatility can also be manually changed in the SBC report if needed.
Risk-Free Rate (r): The interest rate of risk-free securities, typically government bonds.
Continuously compounded “Daily Treasury Par Yield Curve Rates” with a term equal to the expected term of the option as of the grant date.
Dividend Yield (q): The dividend yield of the stock, if any.
Default assumed to be 0%.
Inputs to the ASC 718 expense calculation:
Forfeiture Rate: The expected annual forfeiture rate, if any.
As input by the entity when running the SBC report. Default assumed to be 0%.
Accounting Considerations/Practical Expedients Utilized:
We assume all entities have adopted and implemented ASU 2018-07 which simplifies the treatment of non-employee share-based awards. As such, the stock-based compensation tool treats all non-employee awards under the guidance of ASC 718 and not under the former ASC 505-50 treatment.
We assume that nonpublic entities cannot reasonably estimate the expected volatility of their shares, and thus rely on using an alternative method that uses the historical volatility of a group of “peer” companies selected by the entity before running the SBC report. However, an entity can also manually override this assumption and input the volatility on a case-by-case basis within the ASC 718 output report or initially prior to running the report.
We utilize the practical expedient available to nonpublic entities for estimating the expected term of options of similar awards.
Expected term is calculated utilizing the nonpublic entity practical expedient for estimating expected term as found in ASC 718-10-30-20A and ASC 718-10-30-20B. This estimates the expected term as the midpoint between the employee’s requisite service period (based on the vesting schedule of the award) or the nonemployee’s vesting period and the contractual term of the award.
Share-based payments to nonemployees may be measured based on the expected term or the entity can elect to use the contractual term as the expected term, on an award-by-award basis. Pulley currently only calculates using the expected term, however, an entity can manually override and input the expected term on a case-by-case basis within the SBC output report themselves if they want to utilize the contractual term as the expected term.
We utilize the practical expedient available to nonpublic entities prescribed by ASU 2021-07 to determine the share price for the purpose of calculating the fair value of equity-classified share-based payment awards by using the reasonable application of a reasonable valuation method (e.g., a valuation performed in accordance with Section 409A of the Internal Revenue Code). As such, we utilize the entity’s historical 409A values from the Pulley platform. It is the entity’s responsibility to ensure that 409A values are kept up to date and are regularly performed as needed to be in compliance with Section 409A of the Internal Revenue Code and ASC 718.
An entity can elect to either account for forfeitures as they occur or to estimate forfeitures and adjust the estimate when it is likely to change. Pulley’s stock-based compensation tool currently supports accounting for forfeitures as they occur (i.e. forfeitures estimated at 0%). An entity is also able to use an estimated forfeiture rate and the SBC the tool will update the estimate each period a report is run to make a true-up adjustment for differences between the prior estimate and what actually occurred.
Awards with Graded Vesting (i.e., portions of the award vest at different times during the vesting period):
For employee awards, an entity may either elect the accelerated recognition method or a straight-line recognition method for awards subject to graded vesting based only on a service condition (not performance or market condition). However, compensation cost recognized to date must be at least equal to the measured cost of the vested tranches. The choice of attribution method is a policy decision that should be applied consistently to all employee share-based payments subject to service conditions.
Pulley currently only supports the straight-line recognition methodology. Compensation cost recognized at any date is equal to the greater of the straight-line amount to be recognized or the grant-date fair value of the vested portion of the award on that date.
For non-employee awards, compensation cost is to be recognized in the same period and in the same manner as if the entity paid cash for the goods provided or services rendered.
Pulley utilizes the contractual vesting schedule of non-employee awards as the basis for determining what period to recognize the expense and utilizes a Black-Scholes model to calculate the estimated grant date fair value of an award. To the extent that these assumptions do not align with the requirement under ASC 718 to be recognized in the same period and in the same manner as if the entity paid cash for the goods provided or services rendered, the output of the stock-based compensation tool for these awards will not be appropriate, and will need to be determined by the entity.