Question

Twilio allows developers to incorporate communication capabilities, including voice, messaging, video and authentication, into software applications, via Application Programming Interfaces (APIs). Twilio sells it products primarily by focusing on and servicing software developers. Stock-based compensation (e.g., stock options, restricted stock, etc.) are common forms of compensation for young tech companies. Most companies set the stock option exercise price at the stock’s current market value or slightly out-of-money. Consequently, the option’s grant value is usually less than the current value of the underlying shares. The accounting for stock options is based on the value of the options at the time of grant. Typically, over the option’s service (or vesting) period, the firm recognizes the options’ grant value as compensation expense with a corresponding credit to shareholders’ equity. For 2018, Twilio recognized $93.3 million in stock-based compensation expense (footnote disclosure not provided). Refer to your ACC 502 notes regarding accounting for equity-based compensation for additional information. On its IPO in June 2016, the Twilio’s shares were priced at $15 but ended the first day of trading at $28.53, a 90+% increase. Since then, the share price has continued to climb. As of December 31, 2018, the date of latest year-end, Twilio’s share price was $80 yielding a $10.6 billion market capitalization. Today (June 6, 2019), the shares were trading around $140. In less than two years, the share price is nearly 10x greater than its IPO price. a. In Twilio’s footnote for stock-based compensation (see below, next page), the intrinsic value of the outstanding options as of December 31, 2018 was $543.6 million. Explain whether the $543.6 million in intrinsic value for outstanding stock option is recognized in Twilio’s financial statements? (2 points) b. During 2018 Twilio’s footnote for stock-based compensation (see below, next page) reported that Twilio’s stock option holders exercised over 3.6 million options with an aggregate intrinsic value of $178.5 million. Explain whether the intrinsic value of the options exercised in 2018 is recognized in the Twilio’s financial statements? (2 points) c. For 3b, if the intrinsic value for the stock option exercised is not captured in the financial statements, how should the analyst adjust the reformulated financial statements for the intrinsic value of the options exercised during 2018? (2 points)

Answer 1

Answer a) $543.6mn is the total intrinsic value of outstanding stock options. This is in fact recognized in Twilio’s financial statement, though not all at once.

In accordance to the Intrinsic value method, Twilio should

1. account for change in intrinsic value from 2017 to 2018 and record as expense

2. Adjust the shareholder's equity by the expensed amount

Note: Though please note that under fair value method, expense for stock option granted is recorded once at grant based on option valuation methods available (Black Scholes, Binomial, etc) and do not change YoY

Answer b) The impact for exercised stock option do not impact income statement as it is already recorded when granted and as value changes over the years.

Though exercised options impact the balance sheet - by an increase in shareholder equity on liability side and consideration received (mostly cash) on asset side.

Answer c) If stock option exercised value is not exercised in financials, Analyst should adjust equity value for any further calculation and investigate the balancing item required on asset side.