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Forfeiture Rates

FAS Solutions helps our clients step up their forfeiture rate game by using sophisticated modelling techniques that take the guesswork out of the process.

Employing more advanced methods including our “zero true-up” methodology allows the development of a rate that incorporates back testing, and the impact of corporate transactions, as well as the termination patterns of your employees. A more accurate forfeiture rate can provide better expense forecasting and reduce unexpected impact on your company’s bottom line.

From ASC 718-10-35-5:

“The total amount of compensation cost recognized at the end of the requisite service period for an award of share-based compensation shall be based on the number of instruments for which the requisite service has been rendered (that is, for which the requisite service period has been completed). An entity shall base initial accruals of compensation cost on the estimated number of instruments for which the requisite service is expected to be rendered. That estimate shall be revised if subsequent information indicates that the actual number of instruments is likely to differ from previous estimates. The cumulative effect on current and prior periods of a change in the estimated number of instruments for which the requisite service is expected to be or has been rendered shall be recognized in compensation cost in the period of the change.”

Under ASU 2016-09 forfeiture rate estimation is now optional. However, the majority of our clients still use zero-true up or forfeiture-year averaging methodologies to smooth out expense amortization. The zero-true method rates are averages of the internal forfeiture rate of each grant in the sample weighted by the number of shares granted. The internal forfeiture rate of a grant is the forfeiture rate which if applied to each vesting tranche results in the actual number of shares that vested over the life of the grant. The unweighted historical average rates and value weighted historical average rates are calculated as daily trailing 30-day pre-vest forfeiture rates that are then annualized.

Additionally, for stock options post-vest termination estimation enters into the calculation of expect term calculation. In conjunction with non-linear estimation of post-vest termination our use of historical data is consistent with forfeiture rate calculations. This is just one more reason that clients choose FAS Solutions to assist in calculating forfeiture rates.