Share

Navigating SAB 120: Key Strategies for Compliant Stock-Based Compensation Valuations

The introduction of the Staff Accounting Bulletin No. 120 (SAB 120) by the Securities and Exchange Commission (SEC) has significantly reshaped the landscape of stock-based compensation (SBC) valuations and considerations. This guidance, aimed at addressing the complexities of share-based payment transactions involving material non-public information (MNPI), requires companies to adopt more rigorous and transparent valuation practices.

How to Prepare

Enhanced Valuation Models

One of the most notable impacts of SAB 120 is the refinement of valuation models. Companies have found that leveraging more advanced techniques, such as Monte Carlo simulations and binomial models, is necessary to better estimate the fair value of their SBC awards. These models allow for a more nuanced consideration of stock price volatility and the potential impact of MNPI, such as the expectation of an acquisition or unexpected projected performance. Leveraging these methods can ensure that a valuation is both accurate and compliant with the SAB 120 guidance.

Governance and Timing Adjustments

SAB 120 has also led to the implementation of robust governance protocols to prevent the issuance of “spring-loaded” grants—awards given shortly before the release of positive MNPI. Companies should be more vigilant about the timing of their SBC grants, making necessary adjustments to reflect any anticipated changes in stock price due to upcoming announcements. This proactive approach helps maintain the integrity of financial reporting and aligns with the SEC’s expectations.

Documentation of Key Information

It’s important to document key information as of the grant date. Keeping track of the following will help mitigate any SAB 120 issues:

• Past performance, which could be used to estimate future stock price movement.
• The internal expectation of undisclosed events that could affect the stock price after the grant date.

Improved Disclosure Practices

Transparency needs to be the cornerstone of SBC valuation in the wake of SAB 120. Companies must enhance their disclosure practices, providing detailed information about the assumptions and methodologies used in the valuation process. This includes clear documentation of the economics and terms behind any stock-based compensation. Companies should disclose all MNPI that is factored into the valuation, offering stakeholders a comprehensive view of the company’s approach to the SBC awards.

Some things to include in the stakeholder disclosures:

• Better-than-expected earnings
• Any significant transactions
• Major product launches

Training and Awareness

To ensure compliance with SAB 120, companies should invest in training programs for their finance and accounting teams. These programs should focus on the implications of the new guidance, focusing on proper disclosure protocols, the avoidance of any potential spring-loaded grants, and the application of refined valuation methods. By fostering a culture of awareness and understanding, companies can better navigate the complexities of SAB 120 awareness and maintain robust financial reporting standards, and most importantly, remain compliant.

How Centri Can Help

SAB 120 has created the need for enhanced valuation models, stringent governance protocols, improved disclosure practices, and comprehensive training to stay ahead of MNPI when awarding SBC. Partnering with Centri to navigate the complexities of SAB 120 ensures your company remains compliant while focusing on critical operational and accounting processes. Our valuation professionals can assist companies with their SAB 120 assessment and implementation. Please contact us to learn how we can support your organization’s stock-based compensation valuation needs.

Charles Higgins

Partner | CFA

Charles is a Partner at Centri Business Consulting. He has more than 30 years of experience in providing fairness and solvency opinions in connection with going private transactions, spin-offs, related-party transactions, recapitalizations, and restructurings. He Joined Centri in March 2021, where he utilizes his skillset across a wide variety of industries, including technology, life sciences, healthcare, manufacturing, retail, professional services, and alternative energy. View Charles Higgins's Full Bio

Sabastian Keister

Senior Associate

Sabastian is a Senior Associate at Centri Business Consulting. He has more than 4 years of experience in complex financial instruments, 409a valuations, and purchase price allocations. View Sabastian Keister's Full Bio