The Number Game: Financial Reporting for Equity Compensation

0:00:05.2 Chris Dohrmann: Welcome to Prosperity at Work, the newly branded podcast from JP Morgan Workplace Solutions. You may have tuned in previously when we were known as Own Up, the podcast by Global Shares. So welcome to a new and improved show. As you may know, Global Shares was acquired by JP Morgan some time back, and has now completed this transition to a new brand. On this podcast, you’ll learn about equity compensation, financial well-being and more with expert insights and stories from people who’ve already done the hard work and have lessons to share. And so here we are, new name, new look and feel, and a new co-host here beside me, Lauren Jenkins, our head of Executive Participant Services. Lauren, welcome to the show.

0:00:46.5 Lauren Jenkins: Thank you, Chris. I’m really excited to be here, especially as we unveil our new podcast name and a few new features of the show. So what are we talking about today? Let’s get into it.

0:00:57.5 Chris Dohrmann: Financial reporting. It’s an essential of equity compensation plan administration, but for one of a better word, it can be painful.

0:01:14.0 Lauren Jenkins: There’s no getting around it. How do we get through the sea of complexity, that is, reporting. Today’s guest navigates one of the most complex reporting environments you can imagine. Listeners in the US or North America, may not know Coupang, but it’s the Amazon or eBay of Korea, as well as one of the top three IPOs of 2021, that’s a pretty big deal. We’re joined by Lilyanne Nuevaespana, the Director of Global Accounting, and it’s our pleasure to introduce her now. Lilyanne, welcome to the show.

0:01:41.3 Lilyanne Nuevaespana: Hi, thank you for having me.

0:01:43.1 Chris Dohrmann: Could you tell us a little bit more about Coupang for the listeners that may not be very familiar.

0:01:49.4 Lilyanne Nuevaespana: Oh, yes. Coupang is like, as you said, the Amazon of South Korea. It’s actually now the biggest e-commerce retail company in Korea. And they are well known for what you call the rocket delivery, which, you order from them by midnight and it will be in your door by 7:00 AM. And this is mostly for, especially for groceries and fresh produce and the like… So as you said, they did the IPO in March of 2021, ’cause it’s a US company, it’s listed in the New York Stock Exchange, and that’s why we do all the US Cap reporting and the SEC filings of the 10Qs and the 10-Ks.

0:02:35.9 Chris Dohrmann: You also have a couple of other complexities, so if not for the size of the company and for the multi-national aspect of the company, listing on a US exchange and having a headquarters in Seattle, but having operations primarily in Korea, you also do dual standard, Accounting Standards IFRS 2, as well as US Cap.

0:02:55.1 Lilyanne Nuevaespana: Yes, exactly. So we still have to file all the standalone financials of each country where we operate. So Korea is the biggest one, but we do have operations in Japan, China, Hong Kong. And with the acquisitions of Farfetch, we also have operations in Europe now, which is the UK, Portugal, and Italy are the biggest ones.

0:03:21.4 Chris Dohrmann: So you’re going over there as if it’s routine, there are a number of other things that you do that make the complexity even more so. So, you allocate expensing down to whether it’s the country level, but actually down to the corporate budget level, so you have budget expenses that you keep in the system and allocate expense that way.

0:03:46.6 Lilyanne Nuevaespana: Yes, so each employee is assigned a cost center and an entity, and we do that in Global Shares, it’s in our HR tool, which is called Workday, and our HR to a Workday is interfaced with Global Shares. So those data, the cost center and the entity, we can allocate the expense of that particular employee using those two fields in our reporting and on the system. So it makes it easy for us to allocate expenses to each entity and each cost center.

0:04:27.2 Lauren Jenkins: Regarding the garden leave process and sabbatical tracking in Workday. Can you talk a little bit about how that works for Coupang?

0:04:38.4 Lilyanne Nuevaespana: So every month, we have a summary of anybody who has applied for a leave of absence. So any leave of absence that is more than 90 days, means that your vesting of your shares will also be pushed back 90 days. So we do have a process where we send this to Global Shares, and they will be the one to update all this in the system. We have the Jira ticketing system, for all our requests, so I guess we have set up this system where none of Coupang employees can change anything in Global Shares. Anything that we need to change, we need to send to Global Shares using the Jira ticketing system.

0:05:26.7 Lilyanne Nuevaespana: And they will be the one to change the vesting dates and anything that needs to be changed, then they give us the report back and we have to double check, make sure everything is accurate before they actually put it live in the system. So this is done every week actually, or every day, if we need to change anything, we send it to them, and usually it is done overnight and we get it there. Garden leave is different. Garden leave more of a… If somebody… This is usually for executives, when they terminate and we still give them like, okay, this is your termination date, for example, today, but you see your will still vest one year from now. So that one is totally different for accounting purposes and in the system also, it’s a different kind of change to just a regular leave of absence.

0:06:26.7 Chris Dohrmann: We’re talking about reporting, as if it was something that basically came right out of the box for you, but as a private company that was founded in 2010, and then IPOed in 2021, you had a lot of conversion to do, an orientation for many of your stakeholders about new reporting, because you probably had an abbreviated reporting period right after the IPO to do your first financials, whether it be a Q or a K. How is that process for you? And how did that work?

0:07:00.7 Lilyanne Nuevaespana: Yes, once you do an IPO, there is a lot of compliance and regulations that you need to follow, one of which is reconciliation and the other is segregation of duties. So those two are the main controls that we need to put in place when once you become public, because of the SOX audit and SOX controls, I don’t know if you guys are familiar with SOX controls, but this is like the requirement of the SEC, the Securities and Exchange Commission, under the PCAOB. This was actually formed in way back in 2001 when that [0:07:41.5] ____ happened, a long time ago. So anyway, so before we became IPO, those were the two issues that most private companies have is, segregation of duties. So one person can do a lot of things, and when one person can do a lot of things, fraud can happen.

0:08:03.3 Lilyanne Nuevaespana: So when we did the IPO, we had to separate the operations or the admin side of RSUs and the accounting side of RSUs. Before the IPO there was only one person in charge of everything, the admin and the accounting, and so there was a lot of errors. So when IPO happened, before IPO we moved to Global Shares, but that was… Aside from the segregation of duties and reconciliations, it’s also because of we are in so many countries. We needed someone who can cater to sending money to all these different countries or administering our issues to all these different countries. So there is the accounting side controls, and there is also the operation side where we actually had to move to Global Shares to be able to address all those needs.

0:08:57.9 Chris Dohrmann: The global aspects. And just for our listeners, the SOX refers to Sarbanes-Oxley, the controls that were put in place by that legislation.

0:09:07.5 Lauren Jenkins: So one of the complexities that you’re dealing with at your company is that you’re doing a roll forward for every reporting period. Can you talk to us a little bit about that?

0:09:16.5 Lilyanne Nuevaespana: Yes, so one of the biggest footnotes disclosures needed for the filing of SEC is the roll forward of the shares. It is presented in our statement of equity, and it is also presented in our footnotes. So the way we do it is you need to have your beginning balance, right? Whatever is outstanding. So there are two kinds of RSUs, what is outstanding that’s already in the white CAP, that means it was already issued, right? And then there is also the outstanding, but not yet… It’s outstanding grants is what we call it. So it was already granted to the employees, but they haven’t vested yet, or they haven’t took… Employees have it exercised. So there’s two things that we are monitoring. So the one that is outstanding and in the market, it’s basically, okay, you’re beginning balance, and then what was released and then what was…

0:10:21.2 Lilyanne Nuevaespana: Exercise is actually release an exercise, it would be your outstanding balance out in the market. And then for the ones that are outstanding, granted that would be your beginning balance of what was like outstanding in the previous reporting period, and then you add all the grants, all the RSUs that was granted during the period that we’re talking about. And then forfeiture, you remove all the forfeiture, and then you remove all the ones that were released and exercised. So we used Global Shares reporting for all of these. So we go get all the release report, the exercise report forfeiture reports. So having all these reports and also the [0:11:08.3] ____ Grad Malan report reconciling all this, then we can get those discourses that we need for our filing.

0:11:17.1 Chris Dohrmann: So it sounds like just the regulatory piece of this is only a small part, you use the reporting to also manage dilution, calculate burn rate, make sure that the General Council and compensation committee are updated, so it sounds like all of these people are literally interested in everything that comes out of your department.

0:11:38.3 Lilyanne Nuevaespana: Yes, there’s a lot of stakeholders. We have FP&A that ask for a lot of these reports for budgeting and forecasting purposes, we have global compensation that gets this so that they will know for each employee how much is outstanding, how much is for… This is for planning on the compensation basis for each employee, because ours issue is a big part of the compensation.

0:12:07.7 Chris Dohrmann: Right, and you mentioned executives before, so I mean the executives, even when you were talking about garden leave, they may be the minority of the population, but they hold usually the majority of the shares. So it has a big impact. So a small amount of people have a large impact.

0:12:23.6 Lilyanne Nuevaespana: Exactly, so we really watch those executives when there are movements on those executives who watched them, ’cause they’re very significant in the total.

0:12:32.8 Chris Dohrmann: We’re gonna move to a section now that really highlight your expertise, and we’re gonna call it quick fire. We’re gonna make you talk less because you’ve been very gracious and explaining much of what Coupang does, but we’re gonna ask you some very specific questions. Is that okay?

0:12:47.6 Lilyanne Nuevaespana: Sure.

0:12:48.4 Chris Dohrmann: Great.

0:12:48.5 Lilyanne Nuevaespana: If I have the answers. [chuckle]

0:12:49.8 Chris Dohrmann: Great, I think you will. So, I’ll start. What three things were essential to be able to do your job properly when converting the data on to the system?

0:13:03.6 Lilyanne Nuevaespana: Well, first is accuracy, right? So we do a lot of validations when we did transfer our data. The second one is the timeliness of the reports and timeliness of processing data. Because there is a very specific dates where once, for example, when grants are given, we make sure it’s in the system, and then we have to release letters to all these employees to give them the grants, because those are required, the communication to the employees, so timeliness is also important. And then the third one is, when we have issues, we want somebody who can address them in a timely manner, so that was also one of the requirements that we had that was really important to us, especially during the early stage of implementation in Global Shares.

0:14:02.1 Lauren Jenkins: And what would you say is the sign that things are working well from a financial reporting perspective?

0:14:09.0 Lilyanne Nuevaespana: So we do a lot of recalculating and double checks, so when everything works well in the roll forward reconciliation and we can generate it on a timely basis, then we know that it works very well. When there are unreconciled items that we cannot figure out, which sometimes happen because of the timing, as long as it’s not material, so sometimes we have like 7,000 of shares that we cannot figure out, but 7,000 compared to 20 million of shares is nothing. So we can pass on those and we can just reconcile them the next month. So those things as long as they reconcile and then they roll forward properly, it helps a lot and we are sure the financial reporting is working well.

0:15:05.2 Chris Dohrmann: So it seems like your stakeholders like payroll and Workday, it’s really impact your job and it’s easy to manage the roll forward if you’re gonna use them as an out of period next time using the ticketing system, so great.

0:15:21.4 Lilyanne Nuevaespana: Yes, yes. Definitely.

0:15:23.9 Chris Dohrmann: I’m glad that’s working. Maybe one final quick question is what role do communications with your stakeholders, ’cause you’ve mentioned them a couple of times, play?

0:15:32.4 Lilyanne Nuevaespana: Oh, that’s very important. We have regular communications, they let us know what they need ahead of time, and I guess it’s all… You know how Accounting works, right? We want check list. Everything is a checklisted. What you need, when you need it, when is the deadline? So most of those are already in our checklist, so we know when they need it, but sometimes they do ask for something, and that’s where Global Shares really helps a lot because we can generate reports anytime we want in Global Shares. So they do sometimes ask for things that’s not in the checklist, but we are always ready for it just because we are using this Global Shares, that’s always… Usually it’s all realtime.

0:16:18.3 Chris Dohrmann: Great, I just wanted to thank you for your time, but was there anything that you wanted to talk about before we stop asking you questions? And again, thank you so much for being so gracious with your time, Lilyanne.

0:16:32.9 Lilyanne Nuevaespana: I really wanna thank the accounting team, your financial reporting team for helping us a lot. It was a lot of work, especially the first few months that we were working with Global Shares, but they were very gracious, they always communicate well and they’re very timely in their communication and they have solved a lot of our problems, a lot of our issues, especially with financial reporting, so thank you so much for from Global Shares.

0:17:00.4 Chris Dohrmann: And I wanted to emphasize the fact that there… You’re being very kind again, and the fact at best they’re six hours away, and at worst, they’re sometimes 13 hours away. So the ticketing system and the communication is critical. Thank you again, Lilyanne, from Coupang, Director of Accounting. Thank you so much.

0:17:19.9 Lilyanne Nuevaespana: Thank you again.

[music]

0:17:26.6 Chris Dohrmann: Now, to help us get some even deeper insight on financial reporting, let’s welcome, Mayura Arankalle, our Global Head of Financial Reporting at JP Morgan Workplace Solutions.

0:17:35.6 Mayura Arankalle: Hi, Chris, great to be here.

0:17:38.7 Chris Dohrmann: It’s great to have you. I wanted to just mention quickly, before I forget, Lilyanne was talking about expensing and the fact that they use cost centers. And I wanted to bring up the point that most times the expensing follows the recipient and follows the employee. So I wanted to see how you can explain that to our audience because it’s a little bit of a concept that’s very important, depending on the size of the benefit, but it’s something that people have to make sure that the data gets into the system to reflect that.

0:18:11.4 Mayura Arankalle: No, absolutely. So Chris, the fact is that the accounting standard requires companies to book the cost in the employing subsidiary. That’s the requirement of the accounting standard. But in addition to that, a lot of companies, especially the size of Coupang and the likes, they need to record expense for their management reports, which could be for the purpose of forecasting, budgeting or just a cost location. So it becomes quite important for such companies to track the participants and how they move from one cost center to the other so that they’re booking the expense in the right cost center. So when they’re creating P&Ls for their subsidiaries or at a cost center level for any decision making, it is quite important that the cost is booked in the right cost center and tracking of this for multinational companies can be quite a lot of challenge.

0:19:00.2 Mayura Arankalle: So in order to help that kind of having some sort of an automated system where you could potentially have the data coming through from HR into your financial reporting system could help all financial reporting teams really to streamline this activity and get the right costing at the right demographic data. It is not just the cost center and the movement as well. One of the factors that plays a significant role is that some jurisdictions, for example, does not allow participant to get cash. It does not allow participant to get stock and they need like cash settlement, for example, China. And if a participant moves from a jurisdiction, say like US to China, their award type changes. Now again, this is part of… This is very common for big companies where there are people in all across the world, how do you account for this? Because the accounting treatment as such changes as well. So it’s just not about booking in the right call center, it’s also making the fact that you’re booking the right accounting methodology and that makes it quite difficult for the likes of Coupang to manage.

0:20:05.6 Chris Dohrmann: Yes, you raise an excellent point. The fact that she mentioned it a couple of times as well, accuracy. And the accuracy really is reflected by the quality of the data in, and the timeliness of the data date in. So as long as we’ve given them the wherewithal to make sure the system is updated, it sounds like the expensing can follow suit rather seamlessly.

0:20:26.1 Mayura Arankalle: Yeah.

0:20:26.7 Chris Dohrmann: I did also wanna raise one other issue, that we kept referring, to the fact that leave of absence is something that is available at Coupang, whether or not it’s garden leave upon termination, or whether or not it’s leave of absence. How does that pose an issue for you and how do you address that?

0:20:44.6 Mayura Arankalle: So the view that Coupang has taken, that if there is a garden leave, what it effectively means that the service period gets extended from the original vesting schedule. The view that Coupang has taken is that from an accounting point of view, they will just extend the expensing over the extended period. Now this is a view that is taken by Coupang in terms of their circumstances. However, this could result in a modification accounting because effectively extending the service period could result in modification accounting as well, which creates a lot more complications. So again, it is one of the things that for Coupang we would tracking of the fact that someone has gotten in the garden leave when now his original vesting schedule is no longer the service period, it needs to be extended. We need to make those updates. Again, goes back to… And it can be material because you could have a lot of people with high number of awards whose expense could effectively be extended significantly per a year at least. That makes a big difference on their P&L reporting. Again, just the fact that you can do this on an automated system makes it far simpler and the accuracy level really goes, this is is good in that sense.

0:22:00.6 Lauren Jenkins: So Mayura, communication is obviously a critical piece to success in financial reporting, can you talk to us a little bit about how both internal and external communication come into play here?

0:22:11.0 Mayura Arankalle: Absolutely. Now, in terms of financial reporting, generally these teams are, they have real tight deadlines to book their expense to publish their reports. So they have to close their books. Now, in order to do that, they need to have the data in regarding their share plans in terms of any new awards granted, any participants moving the fair valuations to be done for these awards, any forfeitures terminations, because all of this has a direct impact on the expense calculations, or it could be the deferred tax calculations or it could be the earnings per share calculations. Now that makes it very essential to have a clear communications between the HR and the data flowing through HR through the finance teams. Now that could be… Every company will have their different way of doing it, but in terms of Coupang, it just making sure the right termination means are applied.

0:23:03.0 Mayura Arankalle: So if there are any shares getting profited before the end of the reporting period, that needs to be reported accurately. If some shares are gonna get accelerated on termination, that has a different accounting treatment. So that needs to be reported accurately. If participants are moving from one jurisdiction to the other, that demographic update needs to happen before the close of reporting period. So it’s just making sure that the HR has updated all of these before you close your books, so that when you put your experience and you do your calculations, you have the accurate reports and you don’t have to kind of reverse out any entries in then in the following period just to get an accurate picture. So it’s just important to have… Use technology where possible it could be using a service provider or just having systems in place, but all of this information is recorded timely.

0:23:50.1 Mayura Arankalle: Now, one of the things with Coupang we’ve seen is we have this process documents in place where we followed timelines with them that help them get to their, deadlines, but even given to the fact that we have a bit of time difference in terms of… So they’re based in Korea, we are based in Europe, we try to manage this by using Jira ticketing system where we were able to communicate to them, and not just between my team like, JP Morgan Workplace versus Coupang, it’s also within Coupang’s HR team and our EPM teams as well. So just having this Jira’s ticketing system, which is like a common system, like everybody can see the tickets coming in and being processed, that helps in making sure that we are able to meet the tight deadlines accurately. The data updates have made accurately at the right time. So there is no need to kind of undo stuff, redo stuff, and waste time. So it has helped in the sense of just having clear communications between HR, finance and then if you have an external provider using some sort of technology like Jira ticketing system that helps communicate things faster, get things done faster, and there’s a good audit trail as well just to make sure where the source came, how we made the processes, and what that resulted in.

0:25:00.4 Lauren Jenkins: Absolutely. All critical to a successful process.

0:25:04.3 Chris Dohrmann: Mayura, thanks for joining us. That was really great, and it really puts a tech or an expert spin on the conversation we had with Lilyanne. Thank you very much.

0:25:15.0 Mayura Arankalle: Thank you so much for having me.

0:25:21.3 Lauren Jenkins: And that about does it for this episode of Prosperity at Work by JP Morgan Workplace Solutions. You can find more insights on equity compensation, financial wellness and more by following JP Morgan Workplace Solutions on LinkedIn or checking us out over at globalshares.com.

0:25:35.5 Chris Dohrmann: And as always, remember to follow or subscribe at your podcast provider of choice, and until next time, that’s a Prosperity at Work. Bye.

0:25:45.4 Lauren Jenkins: Bye.

0:25:45.4 Lauren Jenkins: Information provided in this podcast is intended for informational and educational purposes only. It may contain views which differ from the views of JPMorgan Chase and company. For specific guidance on how this information should be applied to your situation, you should consult a qualified professional. For full details see the show notes on your podcast player right now.

0:26:05.2 Chris Dohrmann: The Prosperity at Work podcast is produced by dustpot.io for JP Morgan Workplace Solutions.