Accounting for Stock-Based Compensation Plans

This chapter provides an overview of the accounting features for stock-based compensation plans and discusses how to:

Specify your organization's financial accounting standard.
Select FAS 123 values for stock purchase plans.
Create option groups.
Collect data for the Valuation process.
Create a valuation ID.
Value stock options.
Value stock purchases.
Identify missing valuation records.

Understanding Accounting Features for Stock-Based Compensation

This section provides overviews of the system-supported standards for reporting equity-based compensation and the setup steps for complying with FAS 123.

Supported Accounting Standards

Under FAS 123, companies that offer equity-based compensation plans must report the fair value of plan-related compensation in their financial disclosure statements. Stock Administration provides the tools and reports that you need to comply with these requirements.

The system supports two standards for reporting the value of equity-based compensation:

FAS 123, which specifies that companies must report the fair value of stock options and stock purchases as of their grant dates.
APB 25, under which companies can report the intrinsic value of equity-based compensation.

Companies that comply with APB 25 must still make pro forma disclosures of net income and, if publicly traded, earnings-per-share, as though they had adopted FAS 123.

PeopleSoft Stock Adminisration uses the widely-accepted Black-Scholes option pricing model to calculate the fair value of stock options and stock purchases granted within the system. Black-Scholes uses six inputs in its valuation calculation. Four of these inputs are stored in the system or can be estimated by running reports that gather and calculate historical data.

Setup Steps for FAS 123 Compliance

To prepare Stock Administration to perform stock option and stock purchase valuations:

Select the accounting standard (FAS 123 or APB 25) by which your company discloses the equity compensation on its financial statements
Select a valuation plan type (stock purchase plans only).
Create option groups (stock options only).

Selecting a Financial Accounting Standard

This section discusses how to select your company's accounting standard for reporting equity compensation on financial statements.

When you make the selection, also enter the disclosure date. If you select FAS 123, identify the year in which you adopted the standard.

Note. FAS 123 regulations state that if your company adheres to APB 25 and then adopts FAS 123, you cannot revert to APB 25 at a later time.

Page Used to Select a Financial Accounting Standard

Page Name	Object Name	Navigation	Usage
Stock Table	STOCK_TBL	Set Up HRMS, Product Related, Stock, Stock Rules, Stock Table	Select a financial accounting standard (FAS 123 or APB 25) for reporting equity compensation.

See Also

Setting Up Stock Rules

Selecting FAS 123 Values for Stock Purchase Plans

This section lists the pages that you use to select FAS 123 values for stock purchase plans.

A valuation plan type determines how the share value is calculated for a stock purchase plan offering. Each stock purchase plan can be associated with one valuation plan type. Valuation plan types range from Plan Type A to Plan Type I, and their definitions can be found in FASB statement 123.

Pages Used to Select FAS 123 Values for a Stock Purchase Plan

Page Name	Object Name	Navigation	Usage
Stock Purchase Plan Rules - Purchase	ST_ESPP_PLAN4	Set Up HRMS, Product Related, Stock, Purchase Plans, Stock Purchase Plan Rules, Purchase	Select the valuation plan type that is appropriate to a specific stock purchase plan.
Stock Purchase Plan Rules - General	ST_ESPP_PLAN1	Set Up HRMS, Product Related, Stock, Purchase Plans, Stock Purchase Plan Rules, General	Select the FAS 123 Compensatory Plan check box if the plan is considered compensatory according to FAS 123.

See Also

Defining Stock Purchase Plan Rules

Creating Option Groups

This section provides an overview of option group setup and discusses how to:

Define option group security.
Define selection criteria for option groups.
View the options that meet your selection criteria.

Option Group Setup

An option group is a group of active grants that are to be valued similarly, for example, grants with the same expected life or grants issued to members who have like exercise patterns, such as executives.

You create option groups by defining the set of criteria the system uses to select the grants to be valued. You can base your selection criteria on data contained in the following records: PERSON, PERS_DATA_EFFDT, PER_ORG_ASGN, , JOB, ST_INSIDER_TBL, ST_GRANT, ST_GRANT_VEST, ST_GRANT_EXER.

Because some of these records contain sensitive data, such as compensation rates and birth dates, you can prevent users within specific permission lists from including certain records and fields in their selection criteria.

To define option groups:

Define security for option groups.

Identify the records and fields that are available to users when creating and viewing option groups. This step is typically performed during system implementation.
Define the selection criteria for including options in the same group for valuation purposes.
Preview the list of options that currently meet the defined selection criteria.

Previewing the list of options that currently meet your specifications helps to ensure that you have defined the correct selection criteria. The system automatically applies the selection criteria again, when you launch the Valuation process.
Save the selection criteria.

Note. Once you create a group ID, you cannot delete it online.

See Also

Enterprise PeopleTools PeopleBook: Security Administration

Pages Used to Set Up Option Groups

Page Name	Object Name	Navigation	Usage
Option Group Security	ST_GRP_FLD_SEC	Set Up HRMS, Product Related, Stock, Option Plans, Option Group Security	Define security for option groups.
Define Option Group - Selection Criteria	ST_GROUP1	Stock, Valuation, Define Option Group, Selection Criteria	Define the selection criteria for option groups.
Define Option Group - Potential Group Population	ST_GROUP2	Stock, Valuation, Define Option Group, Potential Group Population	View the options that meet the selection criteria defined on the Define Option Group - Selection Criteria page.

Defining Option Group Security

Access the Option Group Security page for a given row security permission list.

You can limit access to the following eight records, depending on your row security permission list: PERSON, PERS_DATA_EFFDT,, PER_ORG_ASGN, JOB, ST_INSIDER_TBL, ST_GRANT, ST_GRANT_VEST, ST_GRANT_EXER.

Refresh Record Security	When you click this button, the system retrieves the records and fields that you have authority to access (as determined by the row security permission list assigned to you). It also clears any access instructions that were previously defined for the row security permission list that is identified on this page. The refresh feature is appropriate when you have added fields to the selected records and now want to grant users access to the new fields when they create groups. For example, if you add fields to the JOB table, then click this button, the system retrieves all fields in the JOB table including the ones that you added. Warning! If you refresh record security after you grant access to certain records and fields, all access is cleared for you to redefine.
Allow Full Access	Click to enable users that are associated with the row security permission list to access all eight records when creating and viewing groups. The system automatically selects all fields for all of the records that you have authority to access, according to the row security permission list that is assigned to you.
Remove All Access	Click to prevent all users that are associated with the row security permission list from using any of the eight records and related fields as selection criteria when creating groups. Users are also prevented from viewing groups whose membership is based on these records. The system clears all check boxes for all eight records.
Record (Table) Name	The name of the record that are you are viewing appears in this field. Records are displayed alphabetically by name.
Allow Record Access	To enable users to access all fields in the record that is currently displayed, click this button. The system automatically selects the Accessible check box to the right of each field name.
Remove Record Access	To prevent users from accessing all fields in the record that is currently displayed, click this button. The system automatically clears the Accessible check box to the right of each field name.

Record Field Accessibility

Field Name	This field displays the name of the field within the selected record.
Accessible	Select this check box to enable users to include the field within the selection criteria that they specify when creating groups.

Defining Selection Criteria for Option Groups

Access the Define Option Group - Selection Criteria page using a unique group ID.

Select Parameters

Use this group box to define the selection criteria for adding options to the group. The system uses the criteria that you enter to generate the WHERE clause of a SQL select statement. The WHERE clause can contain up to 254 characters.

Group Left Parenthesis	Select a bracket type. The system processes the statement in brackets before it processes the rest of the SQL WHERE clause. You can select a single open bracket ( or up to five open brackets (((((.
Record (Table) Name	Select a record name. Only records with access given in the Option Group Security page are available. This is the record from which you can choose fields.
Field Name	Select a field name. Only fields with access given in the Option Group Security page are available. This field can now be defined with any valid value as part of your selection criteria.
SetID	If you select Job in the Record field and one of the fields listed below in the Field Name field, select the SetID with which the field is associated. In all other cases, the SetID field is unavailable for entry. SAL_ADMIN_PLAN GRADE STEP SALARY_MATRIX_CD DEPTID JOBCODE LOCATION
Group Operator	If you want to perform a mathematical operation, select the appropriate symbol. Valid entries are: <, <=, <>, =, >, >=, and LIKE. If you select LIKE, you can type in a partial value in the Value field. For example, the letter S.
Group Criteria Value	Select a value for the field. If you selected LIKE as the operator, do not enter quotation marks or the % sign in the Value field. This field is case sensitive. Enter the value exactly as it is defined in the database. If entering a date, be sure to enter the proper date format for your environment. For example, to select January 1, 2000 as the date, enter 00-JAN-01 if using Oracle; enter 2000-01-01 if using SQL Server or DB2/UNIX.
Group Right Parenthesis	Select the closing bracket type. If you want to add another parameter to your selection criteria (the WHERE clause), select AND or OR.
SQL Object	The system displays the WHERE clause in this field when you click the Create SQL button.
Create SQL	Click to add the options that fit your criteria to the option group. This button also updates the MetaSQL in the SQL Object field.
View SQL	Click to view the SQL code generated by the WHERE clause.

Prompts with Dependencies

In some cases, the Group Criteria Value field on the Selection Criteria page does not provide a list of valid values to choose from. This is because the field name you selected, by itself, does not give the system enough information to retrieve the appropriate set of values. That is, the values for the selected field are dependent on the values for one or more other fields.

The following table lists the fields whose values are dependent on other fields. While you can type a value for any of these fields in the Value field, the system may not return the results you expect, if the value you enter is not unique.

Record	Field Name	Table	Dependencies
JOB	ACTION_REASON	ACTN_REASON_TBL	ACTION
JOB	CONTRACT_NUM	CNT_ACTIVE_VW	EMPL_ID
JOB	HOLIDAY_SCHEDULE	HOLIDAY_VW	REG_REGION
JOB	PAYGROUP	PAYGROUP_TBL	COMPANY
JOB	EMPL_TYPE	PAYGRP_EMPLTYPE	COMPANY, EMPL_TYPE, PAYGROUP
JOB	GRADE	SAL_GRADE_TBL	SAL_ADMIN_PLAN, SETID
JOB	STEP	SAL_STEP_TBL	GRADE, SAL_ADMIN_PLAN, SETID
JOB	REG_REGION	REG_STANDARD_VW	OPRCLASS
JOB	REVIEW_RATING	REVW_RATING_TBL	RATING_MODEL

Viewing the Options that Meet Your Selection Criteria

Access the Define Option Group - Potential Group Population page.

Collecting Data for the Valuation Process

This section provides overviews of the data that is required to run the Valuation process and the steps for collecting and entering valuation data, and discusses how to:

Run the Expected Life Years Analysis report.
Run the Expected Volatility report.
Enter variables for valuing stock options.

Data Required for the Valuation Process

The Valuation process, which uses the Black-Scholes Option Pricing model, requires six variables. Two of the variables are already stored in the system, two you can derive from system-generated reports, and the remaining two you acquire from outside sources. The variables and their sources are as follows:

Variable	Source
Grant fair market value (FMV)	Stock Administration
Grant price	Stock Administration
Expected life of the option	Derived from the Expected Life report
Expected volatility of the stock price	Derived from the Expected Volatility report
Expected dividend yield	Acquired outside the system
Risk-free interest rate	Acquired outside the system

Steps for Collecting and Entering Valuation Data

To collect and enter report data for the Valuation process:

Run the Expected Life Years Analysis report.

This report helps you determine the expected life years for the Black-Scholes model. The expected remaining life of an option is the length of time before the optionee is expected to exercise the option in full. The report calculates the weighted average expected remaining life for the outstanding shares of the option. The system uses prior exercise information for a designated group of options plus other parameters that you enter to produce the Expected Life Years Analysis report.
Run the Expected Volatility report.

The Expected Volatility report helps you estimate the future volatility of a stock by calculating volatility based on historical stock prices entered through the Daily Prices Tracking page. It analyzes price movements over periods of months, weeks, days, or some other frequency that you choose and can serve as a benchmark from which you can project the expected stock volatility.
Enter variables on the Estimate Table page.

Use the Estimate Table page to create an Estimate ID and to record the expected volatility rates, risk-free interest rates, and expected dividend rates that you want the Black-Scholes Pricing Model to use when it values your stock options.

Pages Used to Collect Data for the Valuation Process

Page Name	Object Name	Navigation	Usage
Expected Life Years Analysis	ST_RUNCTL_STFS001	Stock, Valuation, Expected Life Years Analysis	Run the Expected Life Years Analysis report.
Expected Volatility Report	ST_RUNCTL_STFS002	Stock, Valuation, Expected Volatility Report	Run the Expected Volatility report.
Estimate Table	ST_ESTIMATE	Set Up HRMS, Product Related, Stock, Stock Rules, Estimate Table	Enter variables for valuing stock options.

Running the Expected Life Years Analysis Report

Access the Expected Life Years Analysis page.

Note. The Expected Life Years Analysis report does not include stock options that are cancelled or that allow exercise before vesting. Additionally, options included in the report must have at least one active exercise.

Valuation Method

The valuation method that you select determines how the system estimates the expected life of the grant. You can select one of two valuation methods:

Single Method measures and calculates the expected life from the grant date.

Multiple Method measures and calculates the expected life from each of its vesting dates.

Include Grants

Enter selection criteria in the Include Grants group box and click the Refresh Group button. The grants that meet your selection criteria appear in the Grant(s) to be Processed group box. You can add or remove individual grants from this list.

To be included in the report calculation, a grant must be active and have at least one active exercise record.

Percentage Exercised	If applicable, enter the minimum percentage of a grant that must be already exercised in order to be included in the report.
View SQL	Click this link if you want to see the WHERE clause of the SQL statement that represents your selection criteria.

Running the Expected Volatility Report

Access the Expected Volatility Report page.

Frequency Type

The value that you select in this field determines the number of days the system uses to calculate the annualized volatility.

Valid values are Daily, Weekly, Biweekly, Semimonthly, Monthly, Quarterly, or Annually.

For example, if you calculate volatility for the date range, 01/01/2001 to 12/31/2001, and select Weekly in this field, the system retrieves the fair market value of the stock (based on the FMV method selected for the stock during set up) for every seventh day of the period defined by the from date and the end date. It then determines the annualized volatility by averaging the 52 periods in a year.

If you select Daily, the system bases the annualized volatility on 250 trading days in a year.

Note. The FASB recommends using at least 20 to 30 periods to compute a statistically valid measure (preferably more for long-term options). Ideally, this measurement should be based on a historical period equal to the expected life of the options.

Entering Variables for Valuing Stock Options

Access the Estimate Table page.

Enter a separate row of variables for each year up to the maximum expected life years of the options. For example, if the maximum expected life years for any option is 8.5, enter nine rows of data in the estimate table.

Important! Once an Estimate ID is used in a confirmed valuation, you cannot modify data in that estimate.

High Volatility, Mean Volatility, Low Volatility	Enter the high, mean and low volatility rates that you think are appropriate for the stock. Use the Expected Volatility report to help you determine these rates.
Interest Rate	For U.S. employers, the risk-free interest rate must be the rate currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the options.
Interest Rate Type	Identify whether the interest rate represents a Compounded or Simple rate.
Dividend Rate	Enter the expected dividend rate for the year.

Note. To value a group of restricted stock options or options that can be exercised before they are vested, create an Estimate ID and enter zeros for all of the estimated values. Enter zero for the expected life years when you launch the valuation process.

See Also

Stock Administration Reports

Creating a Valuation ID

This section provides an overview of valuation IDs and discusses how to create a valuation ID.

Valuation IDs

A valuation ID links together:

The stock that you want to value (Stock ID).
The valuation method (single or multiple).
The estimate ID that represents the volatility, interest rate, and dividend rate figures that you entered on the Estimate Table page.
The volatility type (high, mean, or low) that you deem appropriate for the valuation process.

Volatility types correspond to the estimate ID’s high, mean, and low values.

When you run the Valuation process for stock options or stock purchases, you select the valuation ID that you want the system to use.

Page Used to Create the Valuation ID

Page Name	Object Name	Navigation	Usage
Valuation Table	ST_VALUATION	Set Up HRMS, Product Related, Stock, Stock Rules, Valuation Table	Create a valuation ID and link it to a stock’s valuation method, estimated variables for the Valuation process, and volatility type.

Creating the Valuation ID

Access the Valuation Table page.

You can modify any entries on this page until you confirm the valuation.

Valuing Stock Options

This section provides an overview of the procedure for running the Process Grant Valuation process (STFS003) and discusses how to:

Run the Process Grant Valuation process.
View grant valuations.
Revalue repriced options.
Reverse a stock valuation.

Note. The system must have a valuation for all grants issued after the SFAS 123 disclosure date that is noted on the Stock Table page. Any grants that do not have a valuation record, are reported on the Valuation Audit report.

Procedure for Running the Process Grant Valuation Process

The Process Grant Valuation process executes the Black-Scholes Pricing model for the grants that you select. You can run the process in preview or confirmation mode.

To run the process:

Access the Process Grant Valuation page.
Specify the stock ID, valuation ID, and expected life years for the grants to be valued.
Indicate whether you want to preview of confirm a valuation.
Select the grants to include in the process.
Run the process.

Pages Used to Value Stock Options

Page Name	Object Name	Navigation	Usage
Process Grant Valuation	ST_RUNCTL_VALUE	Stock, Valuation, Process Grant Valuation	Run the Process Grant Valuation (Black Scholes) process.
Maintain Grants - Valuation	ST_GRANT_VALUE	Stock, Grants, Maintain Grants, Valuation	View grant valuation information including the shares valued, the grant FMV, and expected life years for a selected employee and grant.
Grant Valuation	ST_GRANT_VAL_SEC	Click the Value Per Share amount displayed on the Maintain Grants - Valuation page.	For grants valued with the multiple valuation method, display detailed information for each valuation period.
Reverse Grant Valuation	ST_RUNCTL_UNVALUE	Stock, Valuation, Reverse Grant Valuation	Deletes specific grant valuations.

Running the Process Grant Valuation Process

Access the Process Grant Valuation page.

Expected Life Years

Enter the expected remaining life that you deem appropriate for the group of options you’re valuing. (You can use the Expected Life Year Analysis report to help determine this number.)

The figure you enter determines which set of variables the system retrieves from the Estimate Table for use in the Black-Scholes Model. The system rounds up if you enter a number with a decimal that equals or exceeds .50. For example, 3.5 and 3.6 are rounded up to 4.

If the Valuation ID represents the multiple valuation method, the Valuation process automatically adds the number you enter in this field to the length of each vesting period.

The expected life must extend beyond the first vesting date but cannot extend beyond the last expiration date. For example, assume today is 07/01/2001, the first vesting date is 07/01/2003, and the last expiration date is 07/01/2011. In this case, the expected life years can be between 2 and 10.

Valuation Run Type

Preview Valuation Report and Create Valuation Records

You can preview the valuation for a group of grants before you create it. Previewing prints the Valuation Detail report without saving the valuation records to the database. This report details the valuation calculation results for each grant processed. You can preview a valuation, change the values on the Valuation Table and run the preview process again.

When you create a valuation record for each grant processed, the system also prints the Valuation Detail report. Once you create a Valuation ID for a given run, you cannot modify it unless you first reverse all valuation records for that Valuation ID.

Include Grants

Specify the Stock ID, Valuation ID, and expected life years for the grants you want to value and whether you want to preview or confirm a valuation.

Select the grants to include in the process and launch the valuation process.

Viewing Grant Valuations

Access the Maintain Grants - Valuation page.

Note. When you use the multiple valuation method to value grants, the values on this page reflect the weighted averages for the grant.

Valuation Reason

When a grant valuation is first confirmed, the valuation reason is set to Initial Valuation.

Reprice appears in this field if this grant has been revalued after repricing.

Value Per Share

This field displays the fair value per share and appears as a hyperlink if the multiple valuation method was used. Click the link to open the Grant Valuation - Detail page, where you can see detailed information for each valuation period.

Revaluing Repriced Options

You can revalue grants after the initial valuation; but only if the revaluation is due to repricing, that is, the original grant has been cancelled and reissued. (A reprice grant number must appear for the new grant on the Grants - Miscellaneous page.)

You must use the same valuation method (single or multiple) to value the repriced grants; however you do not need to use the same Valuation ID.

To revalue the options, run the Process Grant Valuation process for the new grants. The system automatically revalues the cancelled grant, if the new grant is linked to the cancelled grant via the reprice grant number.

Reversing a Stock Valuation

Access the Reverse Grant Valuation page.

To unconfirm valuations for grants that have been previously valued:

Specify the Stock ID.
Select the grants for which you want to reverse the valuation process by entering selection criteria in the Include Grant Valuations group box.
Click the Refresh Group button.

The grants that meet your selection criteria appear in the Grant(s) to be Processed group box. You can add or remove individual grants from this list.
Click Run.

Valuing Stock Purchases

This section provides an overview of the procedures for the stock purchase valuation process and discusses how to:

Produce the Estimate Contributions report.
Calculate the valuation of a stock offering.

Valuation Procedure for Stock Purchases

For stock purchases, the system estimates the fair value of the entire offering based on the fair market value of the stock on the offering begin date or the first grant date.

To value stock purchases:

Produce the Estimate Contributions report.

The Estimate Contributions report calculates the actual contributions for a stock offering.

For each employee associated with the stock plan and offering ID you select, the report lists the grant date, purchase date, and total actual contributions for confirmed stock purchases. It also reports the total and average contribution for all employees.

This information helps you estimate future contributions for the stock offering, which you must enter before launching the Valuation process.
Run the valuation process to calculate the fair value per share.

After you estimate contributions for a stock offering, you create an offering ID and launch the online process to value the offering. The system uses the Black-Scholes Model to calculate the value per share for each valuation period. Valuation periods are determined by the valuation method:
- For the single valuation method, the stock offering is valued as a whole. The valuation period runs from the offering begin date to the offering end date.
- For the multiple valuation method, the stock offering is valued for each purchase date, and can have more than one valuation period. The valuation period runs from the purchase begin date to the purchase end date.
  
  Because there is only one valuation for each stock offering, the valuation record is not effective-dated. You cannot revalue stock purchase offerings.
  
  The value per share is calculated based on the stock purchase plan’s valuation plan type.

Pages Used to Value Stock Purchases

Page Name	Object Name	Navigation	Usage
Estimate Contributions Report	ST_RUNCTL_STFS005	Stock, Valuation, Estimate Contributions Report	Produce the Estimate Contributions report to help you estimate future contributions for the valuation process.
Offering Valuation	ST_OFFER_VALUE	Stock, Valuation, Create Offering Valuation, Offering Valuation	Run the valuation process.
FAS 123 Purchase Expense	ST_RUNCTL_STFS008	Stock, Valuation, FAS 123 Purchase Expense	Creates the FAS 123 Expense Report, which calculates the fair value expense using estimated or actual contribution data.

Producing the Estimate Contributions Report

Access the Estimate Contributions Report page.

Change Percent

If you complete this field, the system first calculates the actual contributions for the stock offering and then increases or decreases the result by the percentage you specify.

For example, if you think that contributions for a future offering will be 10% higher than the current contributions, enter 10. You can enter a positive or negative number in this field.

See Also

Stock Administration Reports

Calculating the Valuation of a Stock Offering

Access the Offering Valuation page.

To run the Valuation process for a stock offering:

Select the Valuation ID.
Enter the estimated contribution for each purchase period.

The Contribution Worksheet group box lists, for each grant date with an offering, the purchase periods to be processed. At the beginning of an offering, enter the total estimated contributions for each purchase period that is associated with the grant. You can use the Estimate Contributions report to help determine the figures that you enter. The Actual Contributions field displays any actual contributions that have been made for each grant date/purchase period combination that is confirmed.
Click the Create Valuation button to begin the process.

The Valuation Periods group box displays the results of the Valuation process.

Identifying Missing Valuation Records

This section provides an overview of missing valuation records and lists the page that you use to identify missing records.

See Also

Stock Administration Reports

Missing Valuation Records

After you run the valuation process for stock options or stock purchases, generate a Valuation Audit report to identify any missing valuation records.

For stock options, the report lists all stock options that have no valuation record for the specified valuation method.
For stock purchases, the report lists all active stock offerings for the selected stock that have no valuation record for the specified valuation method.

Page Used to Identify Missing Valuation Reports

Page Name	Object Name	Navigation	Usage
Valuation Audit Report	ST_RUNCTL_STFS004	Stock, Valuation, Valuation Audit Report	Generates the Valuation Audit report that identifies stock options and stock purchases that are dated after the FAS 123 Disclosure date that do not contain a valuation record.