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As the end of the year rapidly approaches, there are many year-end and start-of-year duties that administrators of stock plans need to start considering. The checklist below is not exhaustive by any means but may include many duties that need attention depending on your professional role, the country of the Issuer and the employee incentive plan(s) offered by your company.

Reconciliation of Data

• Reconcile stock plan administration data with payroll/HR (new hires/participants and terminations)
• Reconcile employee demographic information to ensure current address, business group, etc.
• Determine last payroll cut-off for stock income and tax withholding in 2009
• Audit tax withholding amounts
• Verify any changes in tax rates for participants
• Verify shares outstanding/and reconcile with Transfer Agent numbers
• Balance amounts received from employees with each payroll location and tax authority
• Ensure all 2009 exercises are processed and reset YTD amounts in your files

Coordination with other Corporate Departments

• Prepare Executive Compensation Disclosures
• (US) 10-K or Q -Compensation data for 10-K for Dec.31st year end or for 10-Q if only quarter end
• Section 16 Insiders -ensure filings are current, file year-end Form 5s if necessary
• Data Requests -requests from other departments (Legal, Tax, Accounting, Finance HR, etc)
• Prepare annual report on 10K and distribute to plan participants
• Coordinate year-end close with Payroll including NQ and ISO reporting
• Prepare for stockholders meeting and proxy voting process (typically in Spring)

Grant based plans

• Prepare for distribution of new grants in 2010
• Income Tax Communications - Communications to participants (Section 6039) for exercise of incentive stock options.
• Collect ISO cash exercise Disqualifying Disposition Surveys
• Report ISO dispositions to Payroll
• Provide audit data for all NQSO and Restricted Stock
• Set-up any Blackout periods necessary for year-end reporting and inform participants
• Run report and inform any participants with expiring options in 2009

Employee Stock Purchase Plans

• Collect ESPP Disqualifying Disposition Surveys
• Income Tax Communications - Communications to participants (Section 6039) for transfer of ESPP shares
• Report ESPP dispositions to Payroll

Employee Communications

• Inform plan participants  of stock market holiday hours and last date for trading/settlement in 2009

• Inform employees of tax slip and statement mailing dates
• Set-up any Blackout periods necessary for year-end reporting and inform participants
• inform any participants with expiring options in 2009

General
For your reference please note the holiday closures for Solium and the Exchanges:

As the end of the year rapidly approaches, there are many year end duties for stock plan administrators to consider. The checklist below is not exhaustive by any means but may include items that need attention depending on the employee incentive plan(s) offered by your company. 

Reconciliation of Data

• Reconcile stock plan administration data (new hires/participants and terminations) with payroll/HR
• Reconcile employee demographic information to ensure current address, business group, etc.
• Determine last payroll cut-off for stock option benefit and  tax withholding amount in 2009 (where applicable)
• Audit tax withholding amounts
• Verify any changes in tax rates for participants 
• Verify shares outstanding/and reconcile with Transfer Agent numbers
• Ensure all 2009 exercises are processed and reset YTD amounts in your files

Coordination with other Corporate Departments

• Finance – review requirements and data for the Canadian Executive Compensation Report
• SEDI –ensure filings are current
• Coordinate year-end close with payroll and all data provided for T4’s
• Start early preparations for annual report publication and distribution
• Start early preparations  for stockholders meeting and proxy voting process

Grant based plans

• Prepare for distribution of new grants in 2010
• Coordinate stock option benefit deferrals

Contribution based plans

• Confirm whether contributions will be reported on T4 or T4PS for ER contributions for Employee Profit Sharing Plans (EPSP)
• Ensure that the last contributions for 2009 are processed for inclusion in 2009 reporting
• Ensure that RRSP contributions are received by Dec 29thh and by Feb 25th to ensure processing time for the RRSP tax receipt deadlines.

Employee Communications

• Inform plan participants  of stock market holiday hours and last date for trading/settlement in 2009

• Inform employees of tax slip and statement mailing dates
• Notify employees of timing deadlines to transfer shares to an external RRSP if desired. The RRSP deadline is March 1, 2010.
• Notify  participants who requested an exercise and hold and who  may be eligible to defer.

General
For your reference please note the holiday closures for the Exchanges and Solium:
 

Given budgetary pressures confronted by most developed and developing countries, more governments have enacted, or are enacting, legislation to capture what they believe to be their "fair share" of taxes on wage income earned in their jurisdictions. Additionally, countries are coordinating their reporting and enforcement efforts to prevent "leakage" from the system. This extends to country income and tax information sharing agreements and protocols on allocation of income between countries. And to put teeth into this effort, more countries are assessing exit taxes on transferees from their countries.

The implications for employers and their equity and payroll record keeping systems are potentially significant. Often, an employer extending equity awards will have an income reporting and potentially a tax withholding obligation for employees of a given country. This obligation arises at the time that a country elects to tax the award, with potential taxation events arising at grant of a new award, vesting of an award, exercising of a stock option award or sale of shares now unrestricted or obtained from a stock option exercise. Further, the method used to determine the income can vary by country and is complicated by the foreign exchange rate (and date(s) of calculation) used.

As a result, more companies are making efforts to track internationally mobile employees, especially with respect to recognition of income attached to equity awards. A joint survey of U.S. companies with international equity plans conducted in December 2008 by the U.S.-based National Association of Stock Plan Professionals and Deloitte Tax (responses were from 172 companies granting equity awards in 30 countries) revealed an increasing trend towards tracking and reporting. Just over half of respondents had their employees as part of a formal program tracking mobility dates. Of those tracking companies, three-quarters use an internal tracking system and the remaining quarter uses a third party administrator for their information.

Any consultant would be negligent in suggesting that employers ignore this upward trend, since the consequences are becoming more serious and the likelihood of an audit is increasing. As a practical matter, a company is well served by focusing on:

1. those countries where the employer has a reporting and/or withholding obligation,
2. where internal employer tracking and reporting can be established at a reasonable cost,
3. where the implications of not having a tracking system in place are onerous
4. where the country's enforcement and audit processes are well developed.

Certainly, this entails some degree of risk in other countries not meeting these criteria while acknowledging the practical limitations of putting in place a complete system all at once.

Of note for companies with mobile employees within the U.S., a number of states (especially those with high tax rates and where the mobile employee population is high) are putting in place similar enforcement mechanisms. As is the case internationally, this can entail allocating income and withholding taxes across differing tax jurisdictions; creating a tracking and reporting system can also be complex and expensive.

Solium Equity Consulting can provide guidance on establishing a mobility tracking system. Solium’s flagship global technology solution – Shareworks – also provides mobility tracking ‘out of the box’. The functionality available in this regard is continuously enhanced as some of the jurisdictional challenges mentioned above evolve to become ever more complex and administratively burdensome.

Regular Section

New Senate Bill looks to end “Excessive Corporate Deductions for Stock Options"

Carl Levin (D-Mich.) (left) and John McCain (R-Ariz.) have introduced a bill to the Senate that aims at controlling the amount of corporate tax deductions for stock options. The bill, entitled Ending Excessive Corporate Deductions for Stock Options Act, is intended to correct a discrepancy currently allowed between how stock options are treated on company books and the corporate taxes paid.

Levin stated that “Current stock option accounting and tax rules are out of kilter, leading corporations to report stock option expenses on their financial books at one value, and later on using a different value when claiming an expense on their tax returns. Stock option tax deductions in excess of book expenses often produce huge tax windfalls for companies that pay their executives with large stock option grants."

“We should end the double standard of companies deducting more from their taxes than the stock option expenses shown on their books. By eliminating this outdated and excessive corporate tax deduction, we would not only eliminate a tax incentive that encourages corporate boards to hand out huge executive stock option pay, but also ensure that profitable corporations do not use outsized tax deductions to escape paying their fair share of the tax burden.”

In part because of the tax deduction benefit, the use of stock options as a fundamental part of executive compensation has become common practice for many companies. It is hypothesized by some (including the National Bureau of Economic Research in the paper Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts) that the prevalence and heavy reliance on stock options for executive compensation led to higher risk taking by those individuals in order to maximize the benefits to their personal income. Further speculation exists that it was these high risk decisions that ultimately damaged many firms, leading to the recession.

This bill looks to return balance to the taxation of stock options through the following changes:

• Corporate tax deductions not to be greater than stock option book expense
• Stock option compensation can be deducted the same year it is recorded, not only when the options are exercised
• Research tax credits will use the same value as the stock option deduction

Under the rules of FASB Codification (formerly FAS 123R originally developed in 2005), stock option expenses on financial statements to the SEC use fair market value on the day of grant, however, Section 83 of the tax code, which has remained essentially unchanged since 1969, uses the day of exercise and has yet to be corrected to match the newer FASB guidelines.

In a subcommittee investigation of nine case study companies, the tax deductions claimed equaled approximately five times the expenses reported to the SEC (the combined tax deductions were $1.2 billion while the stock options expensed on the books only equaled $217 million). A further look at IRS data revealed that for corporate tax returns from July 1, 2005 to June 30, 2006, the difference between tax deductions and stock option expenses was $61 billion. Levin stated that “unwarranted and excess stock option deductions” results in $5-15 billion in lost tax revenue per year.

IFRS Off the Backburner

Over the past 12 months the economic fallout has diverted attention and dominated everyone’s concerns but the time may have come where focus in the US accounting world, to some extent at least, is shifting back towards the potential adoption of IFRS by 2014.

89% of financial executives view mandatory conversion to IFRS to be either highly likely or somewhat likely in the U.S., according to a survey by Deloitte.

With the economy starting to turnaround, the Dow breaching the 10K point mark on Oct 14th for the first time since Oct 7th, 2008 and the fallout of the Madoff scandal subsiding, IFRS is likely to grab center stage again for the SEC. At a New York CPA conference on Sept 17th, Jim Kroeker, the new SEC Chief Accountant stated "Turning back to the roadmap will be an important priority for us this fall.” Kroeker added that while the financial crisis may have temporarily diverted attention from IFRS, it also underlined the impact the credit crunch had on a global scale and the need for international standards. He added that of the 200 comment letters received by the SEC, it was “resoundingly clear” that there is wide spread support for global standards but diverse opinions on how to get there.

This may be an opportune time to refocus as the slow progress of the US to transition from GAAP to IFRS seems to be causing some impatience in the global accounting community. Sir David Tweedie, the IASB Chairman, relayed some of the frustration expressed by current IFRS users at the American Accounting Association’s annual meeting that took place the first week of August this year:

“This is a very interesting moment for us, a once-in-a-lifetime moment. Where is the USA? That is a question I am asked all around the world. The convergence program is designed to reduce the cost of transition. FASB is riding two horses: U.S. GAAP and trying to converge at the same time, but so are we. We get a lot of criticism over the favored-nation status toward the United States. The European Federation of Accountancy Bodies has just talked about how the point has been reached where there have been diminishing returns from convergence with U.S. GAAP, particularly as more and more countries, including major economies such as Japan and India, move toward direct adoption of full IFRS, and the IASB should change its strategy and concentrate exclusively on major improvements and simplifications of IFRS for the short term. We think that’s wrong. If you’re going to have global standards, we need the U.S., but it can’t go on indefinitely. We’ve been converging for seven years. We have a timetable to finish in 2011. We have to finish this year."

Canada is set to adopt IFRS in 2011, the same year the SEC will make a final decision for the US whether or not IFRS will be adopted and will set a solid roadmap for transition if it is. There are currently 117 countries using or adopting to IFRS and Tweedie expects that number to 150 by 2011. A further testimony to the international growth of IFRS occurred on September 9th when the trustees of the London-based International Accounting Standards Committee Foundation set forth a proposal to change their name to become the International Financial Reporting Standards (IFRS) Foundation as well as changing the name of the board they oversee (i.e. the IASB will become the IFRS Board). The closing date for comments on the name change is November 30^th.

Accounting Standards Used by
Global Fortune 500 Companies:
US GAAP	42%
IFRS	32%
Japanese GAAP*	9%
Canadian GAAP*	3%
Other	14%
* Have committed to accepting IFRS

For additional Information on IFRS in Canada or the SEC proposed timeline for US transitions, please review the previous KnowledgeWorks articles and white paper below:

SEC releases IFRS roadmap
http://www.solium.com/knowledgeworks/v1i4.html#Roadmap

SEC status briefing on Transitioning GAAP to IFRS
http://www.solium.com/knowledgeworks/v1i3.html#status

Canadian Issuers Checklist for IFRS2 Share Based Payments
http://www.solium.com/knowledgeworks/l2v2.html#art3

Download the white paper GAAPing or IFRSing: The Fundamental Question

The SEC Hit List

Individual(s)	Title	Company	Charge	Status	Penalty
		Hain Celestial Group	backdated and re-priced stock option grants	Settled Sept 3, 2009	No monetary penalty due to cooperation. Permanent injunction from violating securities laws in the future.
James Treacy	President and COO	Monster Worldwide	Fraud for backdating option	Convicted and sentenced	24 months in prison $6.3 million in restitution and $6.3 million in forfeiture
		Broadband Corp.	Stock option backdating	Settled (subject to court approval)	$118 mil + $11.5 mil in plaintiff legal fees

Dramatic Shifts in Employee Engagement Revealed

It’s no surprise that the recession has had a widespread impact on the workforce. In response to tightening financial situations, companies have cut-back on the size of raises (with many issuing full salary freezes), bonuses and other incentive plans in the past year. The impact of these actions are now being seen throughout the workforce as the morale and commitment levels of workers drop significantly.

A recent WatsonWyatt/WorldatWork survey found that engagement levels for employees have dropped by 9 percent since last year. Most noticeably (and especially) is that within the subgroup of key top performers the level of engagement has dropped 25%! Additional concern stems for the findings that 4% believe that pay and benefit changes made by their employers in the past year have had a negative effect on work quality and customer service.

Ryan Johnson, vice president of research at WorldatWork states that:

"One of the many challenges employers will face as the economy recovers is how to re-engage employees, and especially top performers. Taking a total rewards approach and looking at all of the ways companies can motivate and retain, including compensation, benefits, work-life initiatives, and career development, is going to be essential."

Surviving the economic downturn and coming through the other side as a strong and productive company hinges on retaining the top-performing talent in the workforce, as well as ensuring those people are highly engaged. Watson Wyatt’s 2008/2009 WorkUSA Report found that having highly engaged employees resulted in 26% higher employee productivity.

Introducing a new long term incentive plan or bolstering an existing one can not only entice new talented employees but also increase the engagement levels of existing employees.

Trends in Long Term Incentives

The trend that performance awards are becoming preferred over Stock Options and SARs for Long Term Incentives (LTI) isn’t new and expectations are that this trend will continue, especially for Executive Compensation. Comparing 2007 and 2008 numbers shows that performance award popularity has now surpassed stock options.

The prevalence of restricted stock and restricted stock units being used for compensation for non-US employees by US-based companies is an even a stronger trend with a recent boom in the past few years. A recent survey conducted by Deloitte Tax LLP and the NASPP revealed that 84% of companies are now granting restricted stock and/or restricted stock unit awards to non-US employees.

“In this environment, multinationals must be smarter, more efficient and strategic in the global delivery of their equity compensation programs,”
- Sean Trotman, Global Rewards National Leader, Deloitte Tax LLP.