Nonroutine "spring-loaded" grants made by companies to executives merit particular scrutiny by those responsible for compensation and financial reporting governance at public companies, according to SEC staff accounting guidance issued Monday.
In spring-loaded, share-based compensation arrangements, a company grants stock options or other awards shortly before it announces market-moving information, such as an earnings release with better-than-expected results or the disclosure of a significant transaction.
According to Staff Accounting Bulletin (SAB) No. 120, the SEC staff believes that as companies measure compensation actually paid to executives, they must consider the impact that the material nonpublic information will have upon release.
The bulletin explains that companies should not grant spring-loaded awards under a mistaken belief that they do not have to reflect any of the additional value conveyed to the recipients from the anticipated announcement of material information when recognizing compensation cost for the awards.
"It is important that companies' accounting and disclosures reflect the economics and terms of these compensation arrangements," SEC Chair Gary Gensler said in a news release. "This gets to the SEC's remit to protect investors."
SABs represent interpretations and practices followed by the SEC's Division of Corporation Finance and Office of the Chief Accountant in administering the disclosure requirements of federal securities laws. Statements in SABs are not rules or interpretations of the SEC, nor are they published bearing the SEC's official approval.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.