13.10 Disclosures of Spring-Loaded Awards
In November 2021, the SEC staff issued SAB
120, which amends SAB Topic 14.D and provides the SEC staff’s
views on the measurement and disclosure of certain share-based payment awards
granted when entities possess material nonpublic information (i.e., “spring-loaded”
awards).
SAB 120 describes a spring-loaded award as follows:
A share-based payment award granted when a company is in possession of
material nonpublic information to which the market is likely to react
positively when the information is announced is sometimes referred to as
being “spring-loaded.”
As amended by SAB 120, Question 2 of SAB Topic 14.D.3 provides the SEC staff’s views
on the disclosure expectation regarding spring-loaded awards:
Facts: Company D is a public company that entered into a material
contract with a customer after market close. Subsequent to entering into the
contract but before the market opens the next trading day, Company D awards
share options to its executives. The share option award is non-routine, and
the award is approved by the Board of Directors in contemplation of the
material contract. Company D expects the share price to increase
significantly once the announcement of the contract is made the next day.
Company D’s accounting policy is to consistently use the closing share price
on the day of the grant as the current share price in estimating the
grant-date fair value of share options. . . .
Question 2: What disclosures would the staff expect Company D to
include in its financial statements regarding its determination of the
current price of shares underlying newly-granted share options?
Interpretive Response: FASB ASC paragraph 718-10-50-1 requires
disclosure of information that enables users of the financial statements to
understand, among other things, the nature and terms of share-based payment
arrangements that existed during the period and the potential effects of
those arrangements on shareholders. FASB ASC paragraph 718-10-50-2
prescribes the minimum information needed to achieve the Topic’s disclosure
objectives, including a description of the method used and significant
assumptions used to estimate the fair value of awards under share-based
payment arrangements.
Accordingly, the staff expects that, at a minimum, Company D would disclose
in a footnote to its financial statements how it determined the current
price of shares underlying share options for purposes of determining the
grant-date fair value of its share options in accordance with FASB ASC Topic
718. For example, the staff would expect Company D to disclose its
accounting policy related to how it identifies when an adjustment to the
closing price is required, how it determined the amount of the adjustment to
the closing share price, and any significant assumptions used to determine
such adjustment, if material. Further, the characteristics of the share
options, including their spring-loaded nature, may differ from Company D’s
other share-based payment arrangements to such an extent Company D should
disclose information regarding these share options separately from other
share-based payment arrangements to allow investors to understand Company
D’s use of share-based compensation.
Additionally, Company D should consider the applicability of
MD&A and other disclosure requirements, including those related to
liquidity and capital resources, results of operations, critical accounting
estimates, executive compensation, and transactions with related persons.
[Footnotes omitted]
See Section 4.9.2.6 for additional information
related to spring-loaded awards.