Common use of Performance Events Clause in Contracts

Performance Events. The ▇▇▇▇-▇▇▇▇▇ Act requires the SEC to issue rules barring national exchanges from listing any company that has not implemented a clawback policy that does not include recoupment of incentive-based compensation for current and former exec- utives for a three-year period. The SEC has not yet issued its final regulations on these clawback requirements. The ▇▇▇▇-▇▇▇▇▇ Act's clawback requirements are different than the SOX provisions. Under ▇▇▇▇-▇▇▇▇▇, compa- ▇▇▇▇ are required to recover compensa- tion, including options, based on materi- ally inaccurate financial information, regardless of misconduct or fault. Exhibit 1 compares the clawback provi- sions under these the two acts (▇▇▇▇▇ ▇▇▇▇▇▇, “The ▇▇▇▇-▇▇▇▇▇ Act Addresses Corporate Governance,” The CPA Journal, April 2012, pp. 40-42). Comparing Clawback Provisions Applicability CEOs and CFOs Period covered 12 months All current and former executive officers 3 years Even though the SEC has not yet issued the final rules on this provision, several com- panies are already disclosing their claw- back policies, likely because proxy adviso- ry firms such as Glass Lewis and Institutional Shareholder Services consider companies' clawback policies when making their “say- on-pay” voting recommendations. In June 2014, FASB issued its consen- sus of the Emerging Issues Task Force as ASU 2014-12. The EITF concluded that a performance target that affects vesting and is achieved after the requisite service period is a performance condition (ASC 718-10- 30-28). Thus, compensation cost should be recognized over the required service period if it is probable that the performance condi- tion would be achieved. The total compen- sation cost should reflect the number of equi- ty awards that are expected to vest and should be adjusted based on the actual for- feiture rate (trued-up) when those awards are ultimately vested. This consensus provides additional guid- ance and clarification for the accounting treatment of stock compensation awards that have a right of forfeiture or clawback dur- ing the post-performance period. Under this guidance, an entity should not record com- pensation cost until it is probable that the performance target will be achieved. Furthermore, performance conditions affect only the vesting condition of stock com- pensation awards and do not impact the esti- mate of the award's grant-date fair value. ASU 2014-12 is effective for all entities for annual periods beginning after December 15, 2015, and interim periods within those years. The guidance can be adopted on a prospective basis, but it can also be applied on a modified prospective basis for performance targets outstanding on or after the beginning of the first annual period presented as of the adop- tion date. Early adoption is permitted.

Performance Events. The ▇▇▇▇-▇▇▇▇▇ Act requires the SEC to issue rules barring national exchanges from listing any company that has not implemented a clawback policy that does not include recoupment of incentive-based compensation for current and former exec- utives for a three-year period. The SEC has not yet issued its final regulations on these clawback requirements. The ▇▇▇▇-▇▇▇▇▇ Act's ’s clawback requirements are different than the SOX provisions. Under ▇▇▇▇-▇▇▇▇▇, compa- ▇▇▇▇ are required to recover compensa- tion, including options, based on materi- ally inaccurate financial information, regardless of misconduct or fault. Exhibit 1 compares the clawback provi- sions under these the two acts (▇▇▇▇▇ ▇▇▇▇▇▇, “The ▇▇▇▇-▇▇▇▇▇ Act Addresses Corporate Governance,” The CPA Journal, April 2012, pp. 40-42). Comparing Clawback Provisions Applicability CEOs and CFOs Period covered 12 months All current and former executive officers 3 years Even though the SEC has not yet issued the final rules on this provision, several com- panies are already disclosing their claw- Comparing Clawback Provisions Scope Accounting restatement Accounting restatement due to due to material noncompliance material noncompliance with any with the securities laws as a result of misconduct financial reporting requirements under the securities laws Recovery Amount received as incentive- Erroneously awarded incentive- based compensation and profits based compensation (including realized from stock sales stock options) in excess of the amount that would have been paid under the restatement back policies, likely because proxy adviso- ry firms such as Glass Lewis and Institutional Shareholder Services consider companies' ’ clawback policies when making their “say- on-pay” voting recommendations. In June 2014, FASB issued its consen- sus of the Emerging Issues Task Force as ASU 2014-12. The EITF concluded that a performance target that affects vesting and is achieved after the requisite service period is a performance condition (ASC 718-10- 30-28). Thus, compensation cost should be recognized over the required service period if it is probable that the performance condi- tion would be achieved. The total compen- sation cost should reflect the number of equi- ty awards that are expected to vest and should be adjusted based on the actual for- feiture rate (trued-up) when those awards are ultimately vested. This consensus provides additional guid- ance and clarification for the accounting treatment of stock compensation awards that have a right of forfeiture or clawback dur- ing the post-performance period. Under this guidance, an entity should not record com- pensation cost until it is probable that the performance target will be achieved. Furthermore, performance conditions affect Multinational organizations should also be aware that these restrictive covenants may work in some countries, but their enforce- ment may become problematic in others. The covenant may also face legal challenges if equity awards are viewed as part of regular Applicability CEOs and CFOs All current and former executive officers Period covered 12 months 3 years DECEMBER 2014 / THE CPA JOURNAL 25 only the vesting condition of stock com- pensation awards and do not impact the esti- mate of the award's ’s grant-date fair value. ASU 2014-12 is effective for all entities for annual periods beginning after December 15, 2015, and interim periods within those years. The guidance can be adopted on a prospective basis, but it can also be applied on a modified prospective basis for performance targets outstanding on or after the beginning of the first annual period presented as of the adop- tion date. Early adoption is permitted.