What Corporate Lawyers and ParalegalsNeed to Know About FAS 123R…

FAS 123R

Stock Option Reporting for

Law Firm Clients

... to better

serve their

clients

Some Housekeeping

Click to hide or display panel

Type your questions here

Introduction to the Panel

Jeremy WrightVice President of

Customer Services

Doug McCartneyVice President of

Sales

• What exactly is FAS 123R? • How does FAS 123R affect your

corporate clients? • Why is it important that you

provide a solution? • How can law firms, clients, and

accountants work together with one consolidated, secure, system?  

Today’s Agenda

What is FAS 123R, exactly?

• Financial Accounting Standard 123 Revised

• A requirement for all companies doing GAAP standard financials

– since January 1, 2006

– private as well as public

• Net: Equity compensation must now be included in financial statements

– like any other compensation expense 

– a simple footnote is no longer sufficient

How Do You Include The Value of a Future Option in Today’s Financial

Reports?

FAS 123R offers several options, but 99% of private companies will use

the Black-Scholes formula

What Is Black-Scholes?

A calculation that can be done in a spreadsheet, but

– It has to be calculated for each grant

– It has multiple required variables:• Exercise Price • Fair Market Value (of the stock)• Expected term• Risk free interest rate• Expected volatility• Dividend Rate

– All must be documented and tracked over time for the auditors

Once calculated, you get a Fair Value Per Share

Is That All There Is To It? Sadly, No

Tracking and Valuation Go Hand-in-Hand

•The correct amount to expense is directly tied to the details of each option

•Vesting events and option forfeitures have a major impact on the total expense to record

•Separating option valuation from option tracking creates double work and a high probability for error

An Example Process

Result: CFO may get frustrated and look for a new system or change the role of the law firm.

1. Law Firm

Tracks Stock and Options

for Client

2. Client

Duplicates Law Firm Work for Option

Expensing

3. At Year End,

Law Firm Sends Client

Multiple Reports

4.Client then goes

through the FAS 123R work manually to

determine the correct expense recognition

5. Finance sends the auditor the final FAS 123R

disclosure requirements

6. Auditor asks for back-up details

on all the spreadsheets, variables and

data

7. A back and

forth between the 3 parties

continues until the

process is finished

8. Repeat Each

Year

• If a client has options, there are no options to doing FAS 123R

• Using spreadsheets, even if just for FAS 123R, results in a very complex and error prone approach

• Working together in one unified system is the only way to make the process easier and more accurate

Summary of Issues

How Can You Make That Happen?

Have everyone share one complete

and unifying system

The Players and Connections Why everyone needs to work together in a consolidated

solution.

• H.R. Dept.

•Outside Law Firm

•In-House Paralegal

Stock/Option

Administrator

Create paperwork for optionees, process grants, exercises, and cancellations. No direct FAS 123R work, but their work feeds directly into the company’s FAS 123R responsibilities

• CFO

•Controller

Finance

Determine variables for BSM, generate fair value and expense recognition schedules for grants, run expensing reports to give to auditor

• Outside Firm

Auditor

Wants all backup details

•FAS 123R equity compensation reporting must be connected to option plan admin.

•Option plan admin must be connected to stock admin.

•Stock and option admin must be tied to legal supporting documents.

•Auditors are the accounting police and want to see all of the above.

If You Thought You Didn’t Have It…look again

If you’ve used one, you’ve used them both

FAS 123RStandard = FAS 123R

Optional

Example 1Law Firm

• Stock entry

• Option entry

• Print stock certificates

• General administration

Client (i.e. CFO/Controller/VP Finance)

• FAS 123R work

• View Access for everything else

Example 2Law Firm• Stock entry

• Option exercises

• Print stock certificates

• General administration

Client (i.e. CFO/Controller/VP Finance)• Option entry

• FAS 123R workAuditor

• Review via RO

Example 3Law Firm• General oversight

• Print stock certificates

Client (i.e. CFO/Controller/VP Finance)• Stock entry

• Option entry

• FAS 123R work

Auditor• Review via RO

What’s Your Example?

Law Firm Client (i.e. CFO/Controller/VP Finance)

Outside CPA Auditor

One Unified System

-No duplicate work

-Accurate and easy to use

- Reduces cost and time for audits

-Happy clients with time and money for more important legal issues

Let’s take a look…

Questions?

Two Step Software, Inc. Call: (800) 223-8900

Email: info@twostep.com Web: www.twostep.com