Current Accounting Standards Codification, ASC 718 (formerly FAS123r) requires that companies that issue share-based payments, including ESPP, record compensation costs related to the fair value of these instruments. To determine how much compensation expense to record in each period, a company must first value the grant and then apportion the cost over the appropriate service period. There is a lot of data to track and our ESPP Management Tool helps you gather the information for your ESPP plan and automates the expense apportionment over the service life.

The ESPP Management Tool takes existing grant data and computes the expenses net of expected forfeiture rates. All that is necessary is to enter the grant details in the Input section (See Figure 1) along with the per share valuation, the service life (in months), the starting period (month/year) and other optional data. There is help text and information windows available to explain each input and key terms.

Figure 1. ESPP grant information input. The key inputs include the grant name, the grant valuation (as computed by an appropriate valuation model), the service life (generally the vesting schedule for the grant) and the starting period (fiscal period/month and year the grant becomes effective).

You then click the 'Create Annual Expense Sheets' button and the software determines what yearly sheets are required to cover the service life. A window appears informing you of the list of sheets will be created and you confirm the creation and the software creates the sheets.

Grant Expense Data

The system creates sheets to cover each year in to cover all applicable grant service lives. If additional grants are added after a previous creation of annual sheets, only the new service life year sheets are created; the existing sheets will already have the data for the new grants.

You track the grant name, grant date for each grant along with the apportioned expense for each grant in the annual table (see Figure 2). The tracking is presented for monthly periods and is summed quarterly and annually for each grant as well as totalled over all of the grants (see Figure 2). The expense is evenly distributed over the service life for each grant.

Each sheet has a field for expected forfeiture rate entry for each of the twelve periods that allow you to establish your expected forfeiture expense adjustment (see Figure 2).

Figure 2. Example expense computation for a selected list of ESPP grants. The expected and actual forfeiture adjustment is applied to the complete tally over all of the grants.

In order to track the monthly expenses, it is necessary to compute a value for each ESPP grant. Our ESPP Valuation Tool manages this requirement by providing an ESPP-specific Black-Scholes model to compute both the Discount Value and the Look-Back Value for each grant.

Grant Valuation Data

The screenshot below illustrates the assumptions input for the ESPP Valuation Model (see Figure 3).

Figure 3. The input assumptions for the ESPP Valuation Model.

The ESPP Black-Scholes model takes the following data points as inputs:

• Estimated ESPP Shares Granted: the anticipated total number of shares created in the grant. This value will depend on the discounted stock price and the amount each employee within the plan sets aside for plan participation.
• Stock Price for the Grant: the actual stock price set at the start of the contractual period. This value is discounted by the Discount rate to produce the stock price each employee within the plan will pay per share.
• Estimated Volatility: the volatility input for the Black-Scholes model or the potential upside stock movement for the underlying security during the expected life. Please see our Volatility Tool. This powerful tool can help you develop your volatility assumption using historical stock data and is included in the ESPP Bundle.
• Contractual Period: the number months the ESPP grant remains in effect. This is the amount of time the employee is allowed to set aside a portion of their salary to buy shares under the ESPP plan. This input closely resembles the Expected Life term in the traditional Black-Scholes model used to value stock options.
• Expected Dividend Yield: the potential dividend that may be paid by the company on an annual basis.
• Risk-Free Rate of Return: the return/yield of a theoretical risk-free investment.

With this information input into the model, you simply click the 'Calculate' button and the results of the model is output on the next worksheet (see Figure 4).

Figure 4. The output from the ESPP Valuation Model. Notice that both the Discount and Look-Back values are shown and the total values summed to provide an easy way to use the results.

The output of the ESPP Valuation Model includes both the Discount Value and the Look-Back value. These computations separate the value provided by the discount provided to the employee under the plan and the potential future stock value of the remainder. These values are required under ASC718 to value the ESPP stock grant.

The computed value is used in the ESPP Management Tool to compute the monthly expense and to track all of the grants annually (see above).