Risk Assessment & Underwriting Flashcards

A company uses a 'modified grant date' approach under ASC 718 when it changes the terms of an outstanding award. The MAIN accounting risk of a modification is:

Answer: Incremental fair value created by the modification must be recognized as additional expense

Under ASC 718, a modification requires recognition of any incremental fair value (the difference between pre- and post-modification fair value) as additional compensation expense over the remaining service period.

Which scenario would MOST LIKELY cause an equity award to be reclassified from equity to liability classification under ASC 718?

Answer: The company adds a cash settlement alternative that is at the employee's option

When an employee has the right to demand cash settlement, the award must be classified as a liability because the company cannot control whether it settles in shares or cash.

A global equity plan administrator assesses 'securities law registration risk' for a new country. This risk is BEST mitigated by:

Answer: Conducting a country-by-country legal review to determine local registration requirements before granting awards

Securities laws vary significantly by country, and a country-by-country legal review ensures the company complies with local registration, prospectus, or exemption requirements before making grants.

In the context of equity plan administration, 'key person risk' is BEST described as:

Answer: The risk that a single equity plan administrator holds exclusive system access and process knowledge

Key person risk in plan administration refers to over-reliance on a single individual for system access, institutional knowledge, or process execution, creating operational vulnerability if that person is unavailable.

A company's stock price drops 60% after a product recall. The equity plan administrator must assess which IMMEDIATE risk to outstanding employee awards?

Answer: A wave of option expirations since out-of-the-money options may not be exercised before expiration

When the stock falls sharply, outstanding options go underwater and employees may allow them to expire unexercised if the price does not recover before the expiration date, representing lost compensation value.

Which of the following BEST describes 'plan document risk' for a CEP professional?

Answer: The risk that ambiguous or outdated plan terms lead to disputes, litigation, or unintended benefits

Plan document risk arises when plan terms are ambiguous, internally inconsistent, or not updated to reflect regulatory changes, potentially leading to legal disputes or unintended compensation obligations.

A company grants SARs (stock appreciation rights) settled in cash. Under ASC 718, the PRINCIPAL ongoing accounting risk compared to stock-settled SARs is:

Answer: Cash SARs are classified as liabilities and must be remeasured at fair value each reporting period until settlement

Cash-settled SARs are classified as liability awards under ASC 718 and must be remeasured at fair value at each reporting date, causing compensation expense to fluctuate with the stock price.