Financial reporting for equity compensation is not a new topic. However, developments in the complexity of the types of awards offered combined with vagueness in guidance has resulted in an evolution of best practices in financial reporting. Attend this session and hear how best in class companies are currently handling their financial reporting as a result. Get tips for how to handle your financial reporting dilemmas—whether in a system or in excel. What’s more, hear all about the latest trends in award design that are causing financial reporting issues and how best to address these. Financial reporting for equity compensation will never be easier!

1. Joshua Hemmati, Assistant Corporate Controller, ON Semiconductor Corp.
Raenelle James, CPA, Sr. Manager Financial Reporting, Equity Methods, LLC
Joseph Purdy, CEP, Director, Product & Services Engineering, Solium
Best Practices and Trends in
Financial Reporting

2. Disclaimer
This presentation contains general information only and the
respective speakers and represented firms are not, by means of
this presentation, rendering accounting, business, financial,
investment, legal, tax, or other professional advice or services.
Before making any decision or taking any action that may affect
your business, you should consult a qualified professional
advisor. The respective speaker and firm shall not be responsible
for any loss sustained by any person who relies on this
presentation.
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3. Agenda
• Forecasting Trends
• Direct Tracing
• Award Design Trends
• Impact of ASC 718 Proposals on Trends
– Forfeiture rates
– APIC pool tracking
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4. STOCK COMPENSATION FORECASTING

5. Long-Run Strategy Plan
Annual SBC
Budget
YTD
Actuals
Rest of
Year
Forecast
3 or 5 Year Strategy Plan
 Long-run waterfall forecast used an input in
long-run planning exercises
 Granularity in out years is annual/ quarterly
Annual Budget
 Occurs as part of budgeting process for
following year (e.g., September/October)
 Usually only one year in length, but
monthly granularity to facilitate detailed
budget-to-actual variance decomposition
2014 FY 2015 FY 2015 - 2018
When forecast is prepared
These forecast exercises
are updated the budget
developed in November
2013 for FY 2014
Stock Compensation Forecasting
Standard Practices
Based on a calendar year end company

6. Stock Compensation Forecasting
Best Practices to enhance granularity and transparency
Forecast Expense
 Create hypothetical future awards
 Granular (usually at employee level)
 Allows for more accurate summarization by band level/department/cost center
 Layer in retirement eligibility / related provisions that affect slope of expense recognition
 Wherever there is potential variability (e.g., performance awards), introduce scenario analysis
 Stock price and/or multiplier outcomes
 3 scenarios are common: favorable, moderate, and unfavorable (work w/ FP&A for this)
 Infer sensitivity of expense to scenario variables

7. Stock Compensation Forecasting
Best Practices to enhance granularity and transparency
 Incorporate indicative data and implement in a granular (e.g., monthly) waterfall
framework
 Indicative data will facilitate what-if analysis
 Waterfall framework further simplifies responding to ad hoc question and other
requested research
Forecast Expense (cont’d)

8. Expense Forecasting
Items for Consideration – Current & Future Equity
Outstanding Awards
- Constant forfeiture rate
- Consider extraordinary events
- RIF’s
- Modifications,
- Repricings
Future Awards
- Work with HR/Internal Planning
- Estimate price volatility
- Constant forfeiture rate
- Extraordinary events
- New director or officer
- Acquisition
- Shift in compensation
structure,

9. Expense Forecasting
Items for Consideration
ESPP
- Estimate participation rates
- Estimate employee contributions (factor in number of pay periods)
- Consider significant events effecting participation (head count reductions,
acquisitions, change in stock price)
- Derive fair value

10. Stock Compensation Forecasting
Best Practices to enhance granularity and transparency
Integrate with expense forecasting
 Separate processes are recipe for problems
How to forecast settlements
 Retirement eligible awards
 Stock option settlement assumptions
Importance of stock price assumptions
 High, low and moderate assumptions
Forecast Earnings Per Share

11. Stock Compensation Forecasting
Forecast-to-Actual
 Forecast to Actual
 “No surprise is a good surprise”
 Always be able to explain why numbers are above or below target
 Flux Analysis
 Comparisons between periods:
 Current quarter to prior quarter
 Current quarter to comparable quarter of prior fiscal year
 Slice by division or other indicative data
Forecast-to-Actual & Flux Analysis

12. DIRECT TRACING

13. Basic Overview on Corporate Hierarchies
Legal entities A…n
Corporate Cost Center (“top of the house”)
Profit centers 1…n
Divisions 1…n
Cost centers 1…n
 Specific nomenclature will vary from company to company
 Size and complexity of entity structuring relates to industry, tax planning, revenue sourcing,
and many other factors
 Entity structures are highly dynamic and may even change monthly

14. Organizational Structure & Hierarchy Changes
Profit
Center
Legal Entity
A
Division 1
Cost center
A1.001
Cost center
A1.002
Division 2
Cost center
A2.001
Cost center
A2.002
Legal Entity
B
Division 1
Cost center
B1.001
Cost center
B1.002
Division 2
Cost center
B2.001
Profit
Center
Legal Entity
A
Division 1
Cost center
A1.001
Cost center
A1.002
Cost center
A1.003
Division 2
Cost center
A2.001
Legal Entity
B
Division 1
Cost center
B1.001
Division 2
Cost center
B2.001
Cost center
B2.002
Cost center
B2.003
Specific Questions and Considerations
1. How do you know if the hierarchy has changed? Where does that
information live?
2. Cost center employee mobility can be very common and can occur
simultaneously with overall hierarchy revisions. Ensure this form of
mobility is managed.
3. When the hierarchy changes, should expense be restated as if the
then-current hierarchy had always been in place?
4. Are overrides needed because executives are coded in the HRIS
system as being in one hierarchy but, in fact, should have their
expense allocated differently?

15. “Direct Tracing”
Why It’s Important
• Accurate performance measurement at the
business unit level of interest – “direct tracing”
– Statutory reporting
• Prompt business units to directly pay for the
cost of equity granted to their employees
• Comparative analysis to understand lumpiness
of equity granting and expense across
organization
• Facilitate better ad hoc / what-if analysis
regarding potential termination/divestiture
activity
– Budgeting and/or forecasting
Constraints
• Administration:
– Employee mobility between divisions
and cost centers
– Changes to organizational hierarchy
– Retroactive pro-ration of adjustments to
all affected cost centers
• Frequent requests from cost centers to explain
sources of variance and justify allocated costs
• Data problems, especially for foreign
employees
• Journal entry automation
• Corporate taxation

16. Employee Mobility Between Cost Centers
SERVICE PERIOD – 4 Year Cliff Vesting
Cost Center A1.001
Specific Questions and Considerations
1. Do you have a way to track the movement of employees
between cost centers and the dates they were effective
in each?
2. It is very possible the amount of expense recognized for
a single employee grant can be pushed into two or more
cost centers in the same reporting period.
3. You may need to generate expense with and with out
the impact of mobility to show the expense of a grant as
a whole and the breakout of the impact to each cost
center impacted.
Cost Center B1.002
Cost Center
B2.623
Cost Center
A1.001
Cost Center A1.042
YR 1 YR 2 YR 3 YR 4Grant

17. Employee Mobility Between Cost Centers
Cost Center A1.001
Specific Questions and Considerations
1. Impact of expense to a specific cost center can still
arise long after the employee leaves that cost
center (estimated forfeiture rate/ true-up for
actual vesting would need to be accounted for in
each cost center where shares were recognized).
2. Too complicated? Some companies will “move”
all expense of an award to the new cost center so
it follows them fully to the new cost center.
Cost Center B1.002
Cost Center
B2.623
Cost Center
A1.001
Cost Center A1.042
YR 1 YR 2 YR 3 YR 4Grant
SERVICE PERIOD – VEST 2
SERVICE PERIOD – VEST 1
SERVICE PERIOD – VEST 3
SERVICE PERIOD – VEST 4

18. AWARD DESIGN

19. Performance & Market Awards
Performance Based
• Performance Trigger based
upon corporate or personal
goals (e.g., EBITDA)
• Expense is based upon
Intrinsic Value
• Typically an explicit or
implied service period
Market Based
• Performance Trigger based
upon stock price trigger
(e.g., TSR).
• Expense is based upon a fair
value derived from a Monte-
Carlo model
• Can result in a derived
service period

20. Performance Awards (Multiplier Style)
Non-Market Based
• You need to expense the
number of probable units
that will be earned until the
final measurement is
determined.
• If the employee earns 2.5x
the target, the expense will
reflect 2.5x as well.
Market Based
• The probability of units
earned is built into the fair
value. Expense is always
based upon target units.
• If the employee earns 0x
the target, the expense is
still based upon target units
with no credit.

21. Performance & Market Awards
“We don’t like TSR… But we need some focus on TSR…”
• Gradual trend toward including multiple metrics in a single
performance/market award:
– Independent metrics – the “simple” way
• Same performance period
• Same legal vesting date/requisite service period
– Complexity arises from an administrative versus financial reporting
perspectives
• In essence four awards all having different targets moving
independently
• Participants have only received one award agreement

22. Market & Performance Awards
Hybrid design where market and performance conditions interact
Modifier Approach Matrix Approach
Performanc
e Target
Payout
1-Year
EPS
3-Year
TSR
Modifier
Relative
TSR
Percentile
Stretch 150% $1.25 +50% 85th
Target 100% $1.15 +0% 50th
Threshold 50% $1.05 -25% 25th
TSRRanking
Net Income as a % of Target
< 70% 70% 100% 110%
> 80th 0.000 0.900 1.200 1.800
60th -
80th 0.000 0.825 1.100 1.650
40th -
59th 0.000 0.750 1.000 1.500
<40th 0.000 0.675 0.900 1.350

23. EM 2015 SCB Survey Results – Describe Your Perf Awards
The Ascent of Performance Equity
Award with a relative TSR provision 40%
Award with absolute TSR provision 12%
Award with operational target such as EPS, EBITA, ROI 62%
Hybrid award containing both a performance and market
condition
19%

24. Earnings Per Share
ASC 260-10-45-48
Shares whose issuance is contingent upon the satisfaction of certain conditions shall be
considered outstanding and included in the computation of diluted EPS as follows:
(a)If all necessary conditions have been satisfied by the end of the period, those shares
shall be included as of the beginning of the period in which the conditions were
satisfied
(b)If all necessary conditions have not been satisfied by the end of the period, the
number of contingently issuable shares included in diluted EPS shall be based on the
number of shares, if any, that would be issuable if the end of the reporting period
were the end of the contingency period

25. Earnings Per Share
Performance Period Explicitly Stated using Averages…?
Options for Share Inclusion EPS Dilution Computation
Performance Period closes at
the end of the 3 years
Look at historical 3 years
Use current performance
period average
 Assume 0 contingently issuable shares until period stipulated in plan
document is complete
 Large dilution spike (assuming metrics hit) in final year
Use prior FY’s (outside performance period) to determine
contingently issuable shares
In year 1, use current ROI
In year 2, use ROI average of year 1 & 2….

26. Performance & Market Awards
Disclose Incremental Shares Achieved Once Performance Contingency Resolved
Shares
Weighted-Average Grant
Date Fair Value
Aggregate Instrinsic Value
(in millions)
Non-vested December 31, 2010 800 $19.00
Incremental achieved 150 $16.00
Granted 230 $26.00
Vested - $0.00
Forfeited (250) $24.00
Non-vested December 31, 2011 930 $19.00
Incremental achieved 160 $24.00
Granted 240 $32.00
Vested (300) $15.00
Forfeited (240) $27.00
Non-vested December 31, 2012 790 $28.00
Incremental achieved 180 $30.00
Granted 260 $25.00
Vested (280) $19.00
Forfeited (220) $33.00
Non-vested December 31, 2013 730 $23.00 $65.00
Additional achievement
once performance
achievement determined

27. Performance & Market Awards
Some companies update their disclosures every quarter based on new estimates
Estimated incremental shares that will be achieved.
Can change even quarter over quarter depending on
the Expense multiplier.

28. Realized and Realizable Pay
• Summary Compensation Table (SCT)
• Equity compensation awards granted based on ASC 718 grant-date fair
value
• A couple of problems:
• Not linked to compensation earned during the year,
• Failure to eventually earn all/some granted compensation will not show
up in a future SCT
• One alternative: voluntary disclosure of Realized and/or Realizable Pay
• CAP Survey of Fortune 500 companies - 15% supplemented the SCT and
GBPA with realized and/or realizable pay disclosure

29. Realized versus Realizable Pay
Realizable Pay
The amount that the executive expects to realize in the near future, and typically
includes the tracking value of total long-term incentive compensation awarded during
the measurement period, even if such long-term awards
have not yet vested or been exercised
Realized pay
The amount that the executive actually earned during the measurement period, and
typically includes all gains realized upon exercise of options and vesting full-value
equity grants that were exercised or vested during the measurement period
irrespective of when the grants were made.

30. ASC 718 PROPOSALS

31. Proposed FASB Updates to ASC 718
Area Affected High-level Proposal Transition Method
APIC Pool
(As a buffer to P&L)
Remove Prospective
Realization Requirement
(Defer excess benefits in NOL cases)
Remove Modified retrospective
Forfeiture Rate
(Requirement of)
Remove Modified retrospective
Minimum Statutory Withholding
(Liability treatment trigger)
Changed Modified retrospective
Non-employee Awards
(Treatment different than employee awards)
TBD TBD
Private Companies
(Award Valuations)
Simplified Prospective
Cashflow Designations
(Excess tax benefit and tax withholding)
Changed Retrospective

32. APIC Pool – Current vs. Proposed
• Tax windfalls and shortfalls
recorded to additional paid-
in capital (APIC)
• Track net windfalls in a
memo account called an
APIC pool.
• Shortfalls hit P&L only if
the APIC pool is $0
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Push all tax
windfalls and
shortfalls
through the
income
statement

33. Forfeiture Rates - Current vs Proposed
Companies must base
their accruals of
compensation cost on
the estimated number
of instruments for
which the requisite
service is expected to
be rendered
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Companies may elect
whether to include a
forfeiture rate in their
accruals of
compensation cost or
simply record
forfeiture reversals as
they occur

34. Thank You
Joshua Hemmati
Assistant Corporate Controller
ON Semiconductor Corporation
Joshua.Hemmati@onsemi.com
Joseph Purdy, CEP
Director, Product & Services
Engineering
joe.purdy@solium.com
Raenelle James, CPA
Senior Manager, Financial Reporting
Equity Methods LLC
Raenelle.James@equitymethods.com