ACCT 405 CHP 19 Share-Based Compensation and EPS

Accounting for graded vesting

(1) treat each vesting group as it were a separate award (most common approach). (2) account for the entire award on straight line basis over the entire vesting period.

US GAAP allows straight line for graded vesting

IFRS does not allow straight line for graded vesting and instead must view each as a separate award. IFRS also no requirement that company must recognize at least the amount of the award that has vested by each reporting date.

Vesting period

Usually a set time until benefits become irrevocable. May be 'cliff' or 'gradual' (graded vesting).

Restricted stock units are

a right to receive a specified number of shares of company stock; shares are not issued at the time of the grant and only after vesting requirements are satisfied.

Common shares that are reacquired

are time weighted for the period when they were NOT outstanding and then are subtracted from the number of shares in the denominator of the EPS fraction.

Fair value of stock options is accrued

as compensation expense over the service period for which participants receive the options (vesting period). If expiration or forfeiture occurs, company must adjust the compensation expense in the current period and forward.

Stock option plans give employees the option to

buy a specified number of shares of the firm's stock at a specified exercise price during a specified period of time.

US GAAP Denominator for EPS calculations is the same for IFRS but numerator can still differ because

compents of net income often are different under GAAP and IFRS.

Stock option plans with performance conditions

depends on if it is probable or not probable it will be met. If it is probable, compensation must be recognized and expensed. If it is not probably, compensation is not recognized.

Basic EPS is computed by

earnings available to common shareholders divided by the weighted average number of common shares outstanding.

Companies are required to estimate the fair value of stock options on

the grant date. The fair value is determined using one of several statistical option-pricing models so for the purpose of our exam will be given. The option pricing model considers things like exercise price, expected term of the option, current market price, volatility ,expected dividends and the expected risk-free rate of return.

Compensation expense associated with a share of restricted stock award or restricted stock unit is

the market price of unrestricted shares of the same stock at the DATE OF THE GRANT and is accrued as compensation expense over the service period for which participants receive the shares (usually from date of grant to vesting date).

Disclosure notes will have

a reconciliation of the numberator and denominator used in the basic EPS computations to the numerator and denominator used in the diluted EPS computations any adjustments to the numerator for preferred dividends any potential common shares that weren't included because they were antidilutive any transactions that occurred after the end of the most recent period that would materially affect EPS.

Restricted stock is treated similar to exercised options

except since they are not sold there are no cash proceeds to buy back and instead the only proceeds will include the compensation that is not expensed to compute treasury shares. Only include unvested shares as vested are already part of the outstanding shares.

Stock options, stock rights, and stock warrants can be dilutive but

first step is to consider if the exercise price is less than the market price. If it is not, people will not wish to exercise their options.

When testing to see if convertible bonds are dilutive

if the EPS increases, they are antidilutive and are not considered converted for the diluted eps calculation.

Simple capital structure

is when a company has no outstanding dilutive securities. Disclose only basic EPS. NI - preferred dividends/ weighted avg. outstanding common stock.

Stock options with graded vesting

is when recipients gradually become eligible to exercise their options rather than all at once.

Stock split or stock dividends are

not time weighted and are assumed to have been outstanding from the beginning of the year. When reported again in comparative financial statements, previous years' EPS are restated for comparability.

Accounting objective is to record the fair value

of the compensation expense over the periods in which related services are performed. We must (a) determine the fair value of the compensation and (b) expense that compensation over the periods in which participants perform services.

Basic and diluted EPS data are reported

on the face of the income statement for all periods presented.

Treasury stock method

refers to the principle that when options are exercised the company will use those proceeds to reacquire stock.

When the income statement includes discontinued operations EPS data, both basic and diluted, must also be

reported separately for income from continuing operations and net income. Per share amts for discontinued operations are disclosed either on the face of the income statement or in the notes to financial statements.

Share-based compensation consists of

share-based awards such as stock options or shares of stock.

Restricted stock awards are

shares awarded in the name of the employee, although company may retain physical possession of shares; employees have all rights of shareholders subject to certain conditions (hence it's 'restricted').

Dilutive securities reduce earnings per share and are typically

stock options, convertible bonds, convertible preferred stocks. Defined as securities that are not common stock in form but that enable their holders to obtain common stock upon exercise or conversion and increase number of outstanding share.

Stock option pans with market conditions

the company recognizes compensation expense regardless of when, if ever, the market condition is met.

Earnings per share is

the only financial metric dictated by GAAP and required to be on the income statement of all publicly traded firms.

Contingent shares are only included in calculating dilutive EPS if

the shares are to be issued merely to the passage of time or if they're based upon target performance level is already being met.

New shares issued during the year are

time weighted by the fraction of the period they were outstanding.

Restricted stock plans

usually part of an executive compensation and typically tied to continued employment. Two types: restricted stock awards and restricted stock units.

Convertible bonds use the 'if converted' method

which assumes the conversion into common stock occurred at the beginning of the period.

Three step process...

(1) determine the new shares from the conversion of options etc. (2) compute treasury shares purchased with the proceeds (proceeds received + expense avoided divided by the market price) (3) compute the incremental shares less the treasury shares assumed to be repurchased.

When adjusting for the dilutive effects of convertible bonds

(1) numerator is increased by the after tax interest expense that would have been avoided. (2) denominator is increased by the additional common shares that would have been issued upon conversion.