We began this blog in August 2013 with the mission to keep you, the reader, current on the latest financial reporting news. After over 200 posts and a book, it’s time to bid the blog farewell. Over the years, we have appreciated your readership, feedback, and support. Even though the blog is ceasing publication, we are committed to continuing our mission in a different format.
It seems fitting that we end the blog with a look back to 2017 and our 10 most popular posts for the year.
In this week’s blog post, we present a select reading list that has helped us keep up with recent legislative developments around equity and executive compensation.
On the one hand, it is not difficult to imagine that tax changes would have some effect, at the margin, on the mix of the various forms of employee compensation – current cash, deferred/contingent cash, or equity scrips. On the other hand, it is difficult to conjecture a causal relationship between changing financial reporting requirements and lower aggregate (risk-adjusted) take-home worker compensation.
The inauguration of a new POTUS is now behind us. Time, then, to add to the cacophony of pop-prognostications. This blog post will make broad observations regarding potential changes to select corporate tax and other pro-growth economic policies in hopes of teasing out inferences for inputs to a basic valuation framework.
We have published a collection of these posts in a book entitled “Market Participant Perspectives: Selections from Mercer Capital’s Financial Reporting Blog.” For our existing clients and blog subscribers, we hope that the book uncovers a post or two of interest that you might have missed the first time around. For clients that we haven’t met yet, there’s probably no better introduction to our team than the collection of posts in this book.
Golden parachute payments have long been a controversial topic. These payments, typically occurring when a public company undergoes a change-in-control, can result in huge windfalls for senior executives and in some cases draw the ire of political activists and shareholder advisory groups. Golden parachute payments can also lead to significant tax consequences for both the company and the individual. Strategies to mitigate these tax risks include careful design of compensation agreements and consideration of noncompete agreements to reduce the likelihood of additional excise taxes.
What do IRS examiners look for when auditing filings with equity-based compensation plans? The IRS recently released its Equity (Stock)-Based Compensation Audit Techniques Guide, which offers an opportunity to see how the IRS views equity-based compensation arrangements. The guide is intended to assist IRS examiners, as well as to provide insight to corporate and individual taxpayers. Our overview of the Guide is presented in this post.
It is easy to see how employees receiving restricted shares and making a Section 83(b) election can benefit if the price of the stock rises between the grant and vesting dates. An 83(b) election may appear especially appealing to (early stage) startup employees who tend to be (preter) naturally optimistic about the prospects of their employer companies. However, the benefits of a Section 83(b) election – especially after consideration of the risks involved – may be less significant than originally anticipated. Three conditions (often outside the control of the employees) must be met for an 83(b) election to provide a (risk-adjusted) advantage: (1) Securities awarded as compensation have relatively low values at the time of grant; (2) the exit event for the employer company, or other transactions that may provide liquidity to the employees, occurs at relatively high implied valuations; (3) employees remain employed at the granting company until the awards vest. This blog post will primarily address the first condition.
In the world of FASB, goodwill is not delineated into personal goodwill and corporate or enterprise goodwill. However, in the tax world, this distinction can be of critical importance and can create significant savings to a taxpayer involved in the sale of a C corporation business.
Section 409A applies to all companies offering nonqualified deferred compensation plans to employees. We are not attorneys, so we will leave the legal minutiae of that definition for others to grapple with, noting only that generally speaking, a deferred compensation plan is an arrangement whereby an employee (“service provider” in 409A parlance) receives compensation in a later tax year than that in which the compensation was earned. “Nonqualified” plans exclude 401(k) and other “qualified” plans.
For privately held companies (particularly those sponsored by private equity and venture capital funds), getting the valuation process right the first time for equity compensation grant compliance is always the least expensive route in terms of both direct and indirect cost.
Golden parachute payments have long been a controversial topic. These payments, typically occurring when a public company undergoes a change-in-control, can result in huge windfalls for senior executives and in some cases draw the ire of political activists and shareholder advisory groups. Golden parachute payments can also lead to significant tax consequences for both the company and the individual. Strategies to mitigate these tax risks include careful design of compensation agreements and consideration of noncompete agreements to reduce the likelihood of additional excise taxes.
Jimmy Kimmel jokes that “Tax day is the day that ordinary Americans send their money to Washington, D.C., and wealthy Americans send their money to the Cayman Islands.” Tax day is now the day when Medtronic, a leading medical device company headquartered in Minneapolis, will be sending its money to Ireland. On June 15th, Medtronic and Irish healthcare company Covidien PLC announced they had signed an agreement in which the former would acquire the latter for approximately $42.9 billion. One motivation for Medtronic to acquire Covidien has to do with taxes. As part of the acquisition, Medtronic will have a new corporate tax rate of 12.5%, down from a top marginal rate of 35%, just by changing its address from the US to Ireland, using a strategy known as “inversion.”
For hundreds of years, various Chinese dynasties prevented the dissemination of their sericultural secrets along the Silk Road by punishment of death. If anyone were caught smuggling a silkworm egg or cocoon or revealing any information about silk production, well, it would be off with their head. While axes have fallen out of fashion as the weapon of choice for protecting intellectual property, some might argue that they have been replaced by the equally controversial non-compete agreements (NCAs). Massachusetts is considering the adoption of policies to all but eliminate employee non-compete agreements (certain sales of a business are one exception), modeled after California legislation where courts have essentially refused to enforce them. While opinions are split, the winds of change may be blowing against covenants not to compete.
In July 2013, the Organization for Economic Co-operation and Development (“the OECD”) released a whitepaper on transfer pricing documentation surveying the current requirements in various tax jurisdictions as well as outlining compliance issues and making recommendations on transfer pricing documentation going forward. Not surprisingly, the OECD found a lack of congruity among the requirements of taxing authorities in the surveyed countries and a certain level of frustration among business representatives seeking to comply with ever expanding and changing requirements. The OECD is expected to finalize its recommendations and guidelines sometime early this year. It remains to be seen how such recommendations will ultimately impact the global tax environment and if such a level of convergence and cooperation is possible among taxing authorities with varying degrees of resources. Regardless of the OECD’s ultimate recommendations, transfer pricing remains an area where enterprises face stringent compliance requirements.
As the commentary around the IPO of two major social media companies revealed, tax consequences of equity-based employee compensation are not always straightforward and are sometimes poorly understood. Equity compensation structures are legion, with varying tax consequences for employees and employers. Complicating matters further, prescribed accounting treatment for equity compensation expenses, including measurement dates, differ for tax and financial statement reporting purposes. An understanding of the tax consequences to the employees and the employer can help companies choose the optimal structure and instruments for their equity-based compensation plans.
Excitement about the upcoming debut of Twitter as a public company is palpable as related stories and rumors make the rounds in the financial press. Who are the winners, who are the losers?