By: Roger Gilbert, Sr. Accounting Services Manager, Administrative Services
WHY DOES MY EXPENSE FLUCTUATE?
Controllers and financial reporting managers like expense to stay constant over the amortization life of an asset or liability. But equity compensation expense is anything but consistent over the life of an award. This article will help you identify the reasons for the fluctuation.
Consider Q1 on a month-by-month basis with a set of grants in mid-February and the monthly expense will be $10,000. In February the expense will increase by $5,000 and in March another $5,000.
While the February and March expense might be increasing, you had 5 terminations in mid-January and their monthly expense for all their awards was $12,000. So in January expense decreased by $6,000 and in February another $6,000.
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Don't forget the huge bonus grants from 4 years ago finished vesting on January 31. February expense dropped $45,000 because of those grants.
If the performance metric is tied to an event then it is considered Improbably To Vest until the event occurs. So when you spun off that division in March, you got a one-time hit of over $1M!
Likewise, changes in probability over the life of a performance awards result in a cumulative change in the period the probability changed. You don't get to spread the hit out over time.
Last, even if all share counts remain constant for all three months, the February expense will be 10% lower than both January and March. Certent amortizes expenses per day, not per month or year.
Downloading the expense accrual and using sub-totals and pivot tables you can isolate/identify the significant fluctuations in expense.