Chapter 19 AC 311, Kennedy

If 2 years of a 4-year service period have elapsed, and 21 million was expensed in the first year, then what would compensation expenses be in the second year

(2/4 * 80 million) - 21 million

The bond interest that would have been saved if the bonds had not been outstanding throughout the year would have been

(8% * 300 million) = 24 million Take out 25% for taxes, for a total of 18 after-tax interest that gets added

On January 1, 2021, Universal communications issued 10 million SARs

***SEE IF STILL NEED TO DO THIS SECTION

What were critics main 3 objections when the FASB tried to make companies account for stock options on a fair value basis

1. Options with no intrinsic value at issue have zero fair value and should not give rise to expense recognition 2. It is impossible to measure the fair value of the compensation on the grant date 3. The proposed standard would have unacceptable economic consequences

What is the goal behind accounting for share based compensation

1. determine the fair value of the compensation and 2. to expense that compensation over the periods win which participants perform services

A stock dividend of 10% results in a decrease in EPS of

10%

If a share price rises from 35 to 50, the employee receives

15 in cash for each SAR held

For this problem, with 15 million shares, a $20 exercise price, and $24 average market price, and options are exercised on Sep 1, this would be

15 million shares * 20 (exercise price = 300 million dollars / 25 (avg mark price) = 12 million shares The incremental # of shares included in diluted EPS is weighted for the 8 months from Jan 1 to Sep 1

Shares assumed to be reacquired for diluted EPS:

15 million shares x 20 exercise price = 300 million / 25 (average market price) = 12 million shares reacquired

If the 10% forfeiture rate had been in place since the beginning, what would have been the reported compensation expense from the beginning?

18 million/year (what is reported in 2024)

In the example 2 slides ago, if a forfeiture rate of 5% is expected, then Universal's estimated total compensation would be 95% of 80 million, or 76 million. In that case, the annual compensation expense would have been

19 million (76 / 4)

If last years' (2020) EPS was 2.09, or 115 million in net income divided by 55 million weighted-average shares. When reported again for comp purposes in 2021 comparative statements, this figure has to be restated to reflect a 10% stock dividend. What would the calculation be

2020 = 115 / (55 * 1.1) = 1.90 2021: 2

If the options from the example were exercised on Sep 1 and the average per share price of the stock from the beginning of the year until Sep 1 was $24. What would you do for calculating EPS?

Add 5 million shares to the denominator of both basic and diluted This is 15 million total shares issued * 4/12 of the year actually outstanding = 5 million shares

Sovren Financial Corporation reported net income of 154 million in 2021. Its capital structure included the following: Common Stock Jan. 1 - 60 million common shares outstanding Mar 1 - 12 million new shares sold June 17 - A 10% stock dividend was distributed Oct. 1 - 8 million shares were reacquired as treasury stock Preferred Stock, Nonconvertible Jan 1 - Dec 31 - 5 million shares 8%, $10 par Incentive stock options Executive stock grants granted in 2016, exercisable after 2020 for 15 million common shares at an exercise price of 20 per share and current market price of 25

Basic EPS is the same as before Diluted EPS: Denominator: Shares at Jan 1: 60 * 1.1 + New Shares: 12 * (10/12) * 1.1 - Treasury Shares: 8 * (3/12) + Exercise of Options: (15-12) = 78 Numerator: Net Income: 154 - Preferred dividends: 4 = 150 150/78 = 1.92

Sovran Financial reported net income of 154 million for 2021 (tax rate 25%). Its capital structure included the following: Common Stock Jan 1 - 60 million common shares outstanding Mar 1 - 12 million new shares were sold

Basic EPS: Numerator: NI: 154 =154 Denom: Shares at Jan 1: 60 + New Shares: 12 *(10/12) = 70 154/70 = 2.2

Sovran Financial Corp reported net income of 154 million in 2021 (tax rate 25%). Its capital structure included: Common stock Jan. 1 - 60 million common shares outstanding Mar 1 - 12 million new shares sold June 17 - A 10% stock dividend was distributed Oct. 1 - 8 million shares were reacquired as treasury stock

Basic EPS: Numerator: NI: 154 =154 Denom: Shares at Jan 1: 60 * (1.1) + New Shares: 12 *(10/12)*(1.1) - Treasury Stock: 8 * (3/12) = 75 154/75 = $2.05

Sovran Financial Corp reported net income of 154 million in 2021. Capital structure included: Jan 1 - 60 million common shares were outstanding Mar 1 - 12 million new shares sold June 17 - A 10% stock dividend distributed

Basic EPS: Numerator: NI: 154 =154 Denom: Shares at Jan 1: 60 * (1.1) + New Shares: 12 *(10/12)*(1.1) = 77 154/ 77 = 2

Sovren Financial Corporation reported net income of 154 million in 2021. Its capital structure included the following: Common Stock Jan. 1 - 60 million common shares outstanding Mar 1 - 12 million new shares sold June 17 - A 10% stock dividend was distributed Oct. 1 - 8 million shares were reacquired as treasury stock Preferred Stock, Convertible into 3 million common shares Jan 1 - Dec 31 - 5 million shares 8%, $10 par Incentive stock options Executive stock grants granted in 2016, exercisable after 2020 for 15 million common shares at an exercise price of 20 per share Convertible bonds 8%, 300 million face amount issued in 2020, convertible into 12 million common shares What is the basic eps

Basic EPS: Numerator: Net Income: 154 - Preferred Dividends: 4 = 150 Denominator: Shares at Jan 1: 60 * 1.1 + New shares: 12 * 10/12 * 1.1 - Treasury shares: 8 * 3/12 = 150 Basic EPS: 150/75 = 2

Sovren Financial Corporation reported net income of 154 million in 2021. Its capital structure included the following: Common Stock Jan. 1 - 60 million common shares outstanding Mar 1 - 12 million new shares sold June 17 - A 10% stock dividend was distributed Oct. 1 - 8 million shares were reacquired as treasury stock Preferred Stock, Nonconvertible Jan 1 - Dec 31 - 5 million shares 8%, $10 par Incentive stock options Executive stock grants granted in 2016, exercisable after 2020 for 15 million common shares at an exercise price of 20 per share Convertible bonds 8%, 300 million face amount issued in 2020, convertible into 12 million common shares

Basic EPS: unchanged Diluted EPS: Numerator: Net Income: 154 - Preferred dividends: 4 + After-tax interest savings: 24 - (25% * 24) = 18 = 168 Denominator: Shares at Jan 1: 60 * 1.1 + New Shares: 12 * (10/12) * 1.1 - Treasury Shares: 8 * (3/12) + Exercise of Options: (15-12) + Conversion of bonds (12) = 90 Diluted EPS: 168/90 = 1.87 **the 12 for conversion of bonds is adjusted for the 1.1 stock dividend

Sovran Financial Corporation reported net income of 154 million in 2021 (tax rate 25%). Its capital structure consisted of the following:

Common stock Jan 1: 60 million common shares outstanding Basic EPS: 154 (Net income) / 60 (shares outstanding) = 2.57 Same number of shares outstanding through the entire year

1.90 is less than 2, so it appears to be dilutive. But, after the convertible bonds are assumed converted first, then the assumed conversion of the preferred stock would be antidilutive. What happens with conversion of the bonds only and then with conversion of preferred stock

Conversion of bonds: Numerator: -4 from preferred dividends EPS is 1.868 Denom: no effect Conversion of preferred stock: Numerator: no effect Denominator: +2.1 from conversion of preferred shares and Effect is 1.867 Effect of the convertible preferred shares are antidilutive

Universal recorded compensation of 20 million in 21 and 22 based on an 80 million fair value of the stock options issued at the beginning of 2021. Then, in 2023, options with a fair value of $8 million when granted are forfeited due to executive turnover. Universal's JE would look like

Dec 31, 21 Dr comp exp (80 million / 4 years) 20 Cr PIC - stock options 20 Dec 31 22 Dr comp exp (80 million / 4 years) 20 Cr PIC - stock options 20 Dec 31 23 Dr comp exp ((80 - 8)*(3/4)) - 20 - 20 = 14 Cr PIC - stock options 14 Dec 31, 24 Dr Comp Exp ((80 -8) * 4/4 - 20 -20 -14) 18 Cr PIC - stock options 18

What is the diluted EPS for the previous example

Diluted EPS: Numerator: Net Income: 154 + After-tax interest savings: 24 - (25% * 24) = 18 = 172 Denominator: Shares at Jan 1: 60 * 1.1 + New Shares: 12 * (10/12) * 1.1 - Treasury Shares: 8 * (3/12) + Exercise of Options: 15-12=3 + Conversion of bonds: 12 + Conversion of preferred shares 3 = 93 Diluted EPS: 172/93 = 1.85 **The conversion of preferred shares is adjusted for the stock dividend

There are no preferred dividends in diluted EPS but are included in basic EPS bc

Diluted assumes the convertible stock is not outstanding and so no shares would have been paid

If options that have vested expire without being exercised, what journal entry is made (assuming the remaining 5 million options in our illustration are allowed to expire):

Dr PID - stock options (account balance) 40 Cr PIC - expiration of stock options 40

On Jan 1 2021, Universal Communications grants 10 million options to executives. The option permits recipients to acquire 10 million of the company's $1 par common shares within the next 8 years, but not before Dec. 31, 2024 (vesting date). The exercise price is the market price of the shares on the date of the grant, $35/share. The fair value of the options, estimated by an option pricing model, is $8 per option. What are the JEs

Jan 1, 2021 (issue date) No entry Total compensation expense: 8 (est FV per option) x 10 million (options granted) = 80 million of total compensation Allocate 80 million to the four-year service/vesting period = 20 mill/year Dec 31 '21, '22, '23, '24: Debit comp exp 20 Credit PIC - Stock options 20

Under its restricted stock unit (RSU) plan, Universal Communications grants RSUs representing 5 million of its $1 par common shares to certain key executives at Jan 1, 2021. The shares are subject to forfeiture if employment is terminated within four years Shares have a current market price of $12 pershare What are the JE

Jan 1, 21: No entry Total comp expense: $12 x 5 million = $60 million 60 million is allocated over the 4 year service (vesting period)=15 million per year Dec 31, 2021, 22, 23, 24: Dr compensation expense 15 Credit paid-in capital - restricted stock 15 Dec 31, 2024 Debit paid-in capital - restricted stock (5 million shares at $12) 60 Credit common stock (5 million shares at $1 par) 5 Credit paid-in capital - excess of par (difference) 55

On Jan 1 2021, Universal Communications grants 10 million options to executives. The option permits recipients to acquire 10 million of the company's $1 par common shares within the next 8 years, but not before Dec. 31, 2024 (vesting date). The exercise price is the market price of the shares on the date of the grant, $35/share. The fair value of the options, estimated by an option pricing model, is $8 per option. What are the JEs If half the options for the Universal Communications stock option (5 million) are exercised on July 11, 2027, when the market price is $50 per share, the journal entry recorded is:

July 11, 2027 Dr Cash (35 exercise price x 5 million shares) 175 Dr PIC - stock options (1/2 account balance) 40 Cr Common Stock (5 million shares at $1 per share) 5 Cr Paid-in capital - excess of par (to balance) 210 **The market price at exercise irrelevant and do not influence the previously measured fair value of options**

When RSUs are considered a liability payable in cash, the credit portion of the entry as we recognize compensation expense each year is to

Liability - restricted stock

The weighted-average number of shares is done by

Multiplying the amount of added shares during the year by (# of months in issuance in the year/12)

Say Universal revises their estimate of forfeitures to 10% from 5% during the third year (2023). What is the new estimate of total compensation? What would be the new journal entries for years 23 and 24?

New estimate: 80 million x 90%= 72 million Already happened: 2021 Dr Comp Exp 19 (80 * 95% * 1/4) Cr PIC - stock options 19 2022 Dr Comp Exp 19 (80 * 95% * 1/4) Cr PIC - stock options 19 2023 Dr Comp Exp ((80 * 90% * 3/4) - (19 + 19)) 16 Cr PIC - stock options 16 2024 Dr Comp Exp [($80 * 90% * 4/4) - ($19 + $19 + $16)] 18 Cr PIC - stock options 18

What is the adjustment to diluted EPS

Numerator stays the same Denominator: + (15 from actual exercise - 12 from options) * (8/12) = 2

Convertible bonds from prior problem: 8%, 300 million face amount issued in 2020, convertible into 12 million common shares The basic EPS was $2

Numerator: After-tax interest savings: +($24 - 25%(24)) Denominator Conversion of bonds: +12 Diluted EPS: $18/12 = 1.50

Sovran Financial Corporation reported net income of 154 million in 2021 (tax rate 25%). Its capital structure included the following: Common Stock Jan. 1 - 60 million common shares outstanding Mar 1 - 12 million new shares sold June 17 - A 10% stock dividend was distributed Oct. 1 - 8 million shares were reacquired as treasury stock Preferred Stock, Nonconvertible Jan 1 - Dec 31 5 million shares 8%, $10 par

Numerator: NI: 154 - preferred dividends: 4 =150 Denom: Shares at Jan 1: 60 * (1.1) + New Shares: 12 *(10/12)*(1.1) - Treasury Stock: 8 * (3/12) = 75 150 / 75 = 2

Conversion of preferred stock from prior problem: Preferred Stock, Convertible into 3 million common shares Jan 1 - Dec 31 - 5 million shares 8%, $10 par

Numerator: Preferred dividends: +4 Denominator: Conversion of preferred shares: +3 4/3 = 1.5 (less than 2, so dilutive)

If the 300 million of bonds in the previous example had been issued below face value at 282 million, what would be the adjustment to earnings

Numerator: + [24 + (18/10)] * (1-25%) Denominator: stays at 12 The interest expense would include 24 million stated interest plus 1/10 of the bond discount since the maturity is 10 years

If the preferred shares were convertible into 2.1 million shares rather than 3 million, the incremental effect would be

Numerator: Preferred dividends: +4 Denominator: Conversion of preferred shares: +2.1 =1.90

In the previous convertible bonds example, we assumed that the bonds had been converted at the beginning of the reporting period since they were outstanding all year. If the bonds had been sold/issued on Sep 1, the adjustment to EPS would be

Numerator: [24 - 25%*(24)] * (4/12) Denominator: 12 * (4/12)

An example of an antidilutive effect piece of information is

Stock Warrants Warrants granted in 2020, exercisable for 4 million common shares at an exercise price of 32.50 per share. However, the current market price is 25, so it is considered antidilutive and does not effect diluted or basic EPS

The formula for finding the appropriate comp expense for a particular year for an option is

Total comp exp * % of non-forfeited options * (year #/total # of years)

If the employee will receive cash or can elect to receive cash, the award is considered

a liability A cash SAR requires a transfer of assets, and therefore is a liability

Since companies are required to now account for stock options at fair value, there has been

a shift toward bonuses and restricted stock awards

stock options plans give employees the option to purchase

a specified number of shares at a specified price during a specified period of time

What factors make eps more complicated

a. number of shares changes during the reporting period b. the earnings available to shareholders are decreased by dividends to preferred shareholders c. take into account the impending effect of potential common shares

How is a restricted stock share accounted for

accrue the market price at the grant date as compensation expense with a credit to paid in capital - restricted stock

What is the adjustment to BOTH basic and diluted EPS

add 5 million shares to denominator (15 million shares * 4/12)

For diluted EPS only you would

add the incremental shares that would have been issued prior to the actual exercise of options if we pretend the options were exercised at the start of the period

Any new shares are_____, while the reacquired shares are _______

added; subtracted

Any market price changes that might occur after the grant date do not

affect the total compensation (same as accounting for restricted stock units to be settled in shares)

the stock distribution does not increase the number of shares sold or purchased

after the distribution

If the incremental effect of the convertible bond is higher than basic EPS, the effect of the security is

anti dilutive

exercise price> market price means

anti-dilutive (no effect on eps of either kind)

when a net loss is reported, stock options that otherwise are dilutive are now

antidilutive

When the effect of the conversion or exercise of potential common shares would be to increase, rather than decrease, EPS, these are called _______. They are ignored when calculating both basic and diluted EPS

antidilutive securities

Since a rational investor would not exercise options at an exercise price higher than the current market price, options with an antidilutive effect

are not considered exercised

When new shares are sold, both

assets and SE are increased by additional investment in the firm

by the if converted method, assume that a convertible security was converted into common stock

at the beginning of the period (or when it is issued, if later)

If the exercise price is higher than the market price, and you assume shares are sold at the exercise price and repurchased at the market price, this would mean

buying back more shares than we sold. EPS would increase not decrease

how do you take into account the dilutive effect of a share increase that might mislead investors and creditors

calculate eps twice

Convertible preferred stock are also accounted for by

calculating EPS as if conversion had already occurred by adding shares to the denominator

Sometimes, recipients of RSUs are given

cash equivalent of the number of shares used to value the RSUs (terms might allow employee to choose

when the shares vest and the restrictions are lifted, PIC-restricted stock is replaced by

common stock and PIC - excess of par

The total compensation, estimated by an option's fair value, is reported as

compensation expense over the period of service for which the options are given

When an RSU is considered to be a liability, determine the fair value at the grant date and record this amount as

compensation expense over the requisite service period

if a firm has potential common shares outstanding, it is said to have a

complex capital structure

the treatment of convertible bonds is equally applicable to

convertible notes payable

other types of potential common shares include

convertible preferred stock, stock options, and contingently issuable securities

in the past, options were measured at intrinsic values, which is the

difference between the market price of the shares and the option price at which they can be acquired ie: 25 per share stock at 10 dollars has a intrinsic value of 15

A stock dividend is not considered to be a

dilution of eps. Shareholders' interests remain the same just divided into more shares

Since the incremental effect of the convertible bonds is less than the basic EPS, the effect of the security is

dilutive

basic EPS is calculated as

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

summarizes the performance of business enterprises into a single number

earnings per share (EPS)

The shares of a restricted stock award are subject to forfeiture if

employment is terminated within a specified number of years from the date of grant The employee cannot sell the shares during this restriction period

If the employer can elect to. settle in shares of stock rather than cash, the award is considered to be

equity

a stock option whose issuer later chooses to settle in cash is not an

equity instrument cash settlement is equivalent to repurchasing an equity instrument for cash

The default approach of estimating forfeitures is to

estimate the % of options that will be forfeited and adjust grant date calculation of the FV of the options to reflect that expectation

Estimating the fair value of an option requires the use of one of several option pricing models. The model should take into account

exercise price of the option expected term of the option current market price of the stock expected dividends expected risk-free rate of return during the term of the option expected volatility of the stock

When a SAR is considered to be equity, estimate the

fair value of the SARs at the grant date and accrue that compensation to expense over the service period Do not revise for subsequent changes in the price of the underlying stock

The first method is to estimate a % of options that would be forfeited. The second method is to record

forfeitures of options or restricted stock when the forfeitures actually occur

the periodic expense (when a SAR is payable in cash and considered a liability) is the

fraction of the total compensation earned to date by recipients of the SARs (based on the elapsed fraction of the service period) reduced by any amounts expensed in prior periods If the fair value at the end of a period is $8, and 10 million SARs are expected to vest, then the total compensation would be $80

If options are actually exercised during the reporting period, then include

in denominator both basic and diluted, include number of shares issued * # of months remaining in year/12

Changes in compensation estimates are a catch-up adjustment in the period of change, which is

inconsistent with the usual treatment of a change in estimate

When a stock distribution occurs during the reporting period, any sales or purchases of shares that occur before the distribution are

increased by the distribution

a stock dividend or stock split has the effect of

increasing the # of shares without increasing the firm's assets. Splitting the same pie into smaller pieces

Therefore, a stock dividend or split is recognized in EPS by

increasing the number of shares

To determine whether convertible securities are dilutive and should be included in a diluted EPS calculation, compare the

incremental effect of the conversion (as a fraction) with the EPS fraction before the effect of a convertible security is considered

Rather than recording comp expense and paid in capital for the net amount of awards expected to vest, companies can

initially record compensation based on the total amount and then reduce comp expense and PIC only if and when there are forfeitures

by the if converted method with a convertible security, increase the numerator by the

interest (after-tax) on bonds or other debt or the preferred dividends that would have been avoided if the convertible securities had not been outstanding due to having been converted

Unlike restricted stock awards, shares are not

issued at the time of the grant

If an employee will receive cash or elects to receive cash, the award is considered a

liability rather than equity

if a company has a net loss, we report a

loss per share

the compensation with a share of restricted stock is the

market price at the grant date of an unrestricted share of the same stock

Stock options are accounted for the same way as restricted stock. So, the process is to

measure compensation as the fair value of the stock options at the grant date and then record that amount as compensation expense over the service period for which employees receive the options

If no dividends are declared for the year, you should still adjust for preferred dividends because

most preferred stock is cumulative, and so when dividends are not declared, the unpaid dividends accumulate to be paid in a future year when dividends are subsequently declared (assumption is that the year's dividend preference will eventually be paid)

In the most basic example, EPS or net loss per share is a firm's

net income (or net loss) divided by the # of shares of common stock outstanding throughout the year

Plans in which the exercise price equals the market value of the underlying stock at the date of grant have

no intrinsic value and result in zero compensation. This means a lot of executives comp is non taxable

The additional shares created by a stock dividend are

not weighted for the time period they were outstanding. Treat them as though the split occurred at the beginning of the year

Who benefits from a delay in the increase in outstanding shares

other shareholders

How long is PID - restricted stock account used

over the period in which participants receive the shares (from the date of grant to when restrictions are lifted, or the vesting date)

When RSUs are considered a liability, it is necessary to

periodically adjust the liability (and corresponding compensation) based on the change in the stock's fair value until the liability is paid

in this case, convertible bonds are referred to as ____. Other examples include stock, stock options, and contingently issuable shares

potential common shares

securities such as convertible bonds that may dilute earnings per share are referred to as

potential common shares

For a simple capital structure (no potential common shares), a single

presentation of basic earnings per common share is enough

for diluted EPS, we assume that the proceeds from exercise of the options were used to

reacquire shares as treasury stock at the average market price of the common stock during the reporting period

dilute means to

reduce earnings per share

when shares are actually awarded in the name of the employee, though the company might retain physical possession of the shares. The employee has all rights of a shareholder

restricted stock award

the two types of restricted stock plans, which means they are tied to continued employment, are

restricted stock awards and restricted stock units

a right to receive a specified number of shares of company stock. have become a much more popular form of compensation than restricted stock awards examples include performance bonus, signing bonus, or regular compensation

restricted stock units (RSUs)

When there is a stock dividend, you should

retroactively restate previous years' EPS

any potential common shares not included in dilutive EPS bc they are antidilutive should be

revealed in the disclosure notes

Securities are included in the eps calculation in what order

reverse order, starting with the lowest incremental effect (most dilutive) followed by the next lowest, etc.

If restricted stock shares or RSUs are forfeited bc an employee leaves the company, entries previously made related to that employee are _______ and the result is ______

reversed a decrease in compensation expense in the year of forfeiture. Total compensation, adjusted for the forfeited amount, is allocated over the remaining service period

The shares of an RSU are distributed as the recipient

satisfies the vesting requirement

if a firm has no outstanding securities that could potentially dilute earnings per share

simple capital structure

when employees are not awarded with shares but rather given the option to buy shares in the future

stock options

When a senior class of shareholders (ie preferred) is entitled to a specific allocation of earnings (ie preferred dividends), those amounts are

subtracted from earnings before calculating earnings per share

How is the change in estimate of stock option forfeiture different than a change in estimate of depreciable assets if a company acquires a four year depreciable asset having an estimated residual value of 5% of cost?

the 76 million depreciable cost would be depreciated straight line for 19 million per year over four years If the residual value changes after two years to 10%, the new depreciable cost of 72 has been reduced by 38 in DE the first two years (72 - 38) = 34 remaining to be depreciated, which would be depreciated equally, 17 per year, over the last 2 years

by the if converted method with a convertible security, increase the denominator of the EPS fraction by

the additional common shares that would have been issued upon conversion

In the prior example, when treasury stock was sold with the treasury stock method, the number of shares assumed repurchased is fewer than the number of shares assumed sold because

the buyback (avg market price) is higher than the exercise price EPS decreases as a result

diluted EPS incorporates

the dilutive effect of all potential common shares

basic eps ignores

the dilutive effect of potential common shares

Do not subtract the preferred dividends in the numerator bc

the dividends would have been avoided if the preferred stock had been converted

In the case of the executive stock options in previous examples, we knew that the effect of them would be dilutive because

the exercise price was less than the market price (fewer shares would be repurchased at the avg. market price than assumed issued at exercise price) denominator increases causing fraction to decrease

If you have a loss per share of 2 calculated by ($150 milllion) in earnings / 75 million shares = (2.00) If stock options are exercised that increase the number of shares by 5 million, then

the loss per share is now ($150 million) / 80 million shares = (1.88) The loss per share has declined These shares are considered anti dilutive since they make performance look better, and are not included in the calculation of eps

For dilutive EPS, we assume that

the options were exercised at the beginning of the period OR when the options were issued if that is later Also assume that cash proceeds from selling the new shares at the exercise price are used to buy back as many shares as possible at the shares' avg. market price during the year

To include the dilutive effect of a security means to calculate EPS as though

the potential increase in shares already has occurred

The fair value of a SAR and the fair value of a stock option with the same terms are usually

the same

Though RSUs delay share issuance and avoid admin complexities of outright awards of restricted stock, accounting for RSUs to be settled in stock is

the same as for retired stock awards

The reason the shares repurchased in October are not multiplied by 1.1 to adjust for the 10% stock dividend is that

the shares were repurchased after the June 17 dividend

Thetreasurymethodwithstockoptionsassumes

thedividendhasalreadybeenapplied

potentially dilutive convertible securities are reflected in diluted EPS calculations by assuming

they were converted

If shares are reacquired during the period (either retired or treasury stock), the weighted average number of shares is reduced. the number of reacquired shares is

time-weighted for the fraction of the year they were NOT outstanding, prior to being subtracted from the number of shares outstanding during the period

The record forfeitures as they go method only applies

to employee turnover. Companies must disclose their method of choice

the method used to account for the dilutive effect of stock options in which you assume that the company uses any proceeds from stock sold through options, convertible bonds, etc. are used to purchase treasury stock is the

treasury stock method

Only include in diluted EPS the

treasury stock method for the options time-weighted for the months prior to the actual exercise

Represents the period of time in which recipients of options are not allowed to exercise their options for a specified number of years. Measured between the date the options are granted and first date they can be exercised

vesting period (service period over which compensation expense is reported)

A potential dilution to eps is

when a firm has convertible bonds outstanding and these bonds get converted, which increases common shares and could decrease eps

The way you account for stock options has no effect on cash flows, only on

whether the value of stock options is included in expenses