Chapter 19: Share-Based Compensation and Earnings Per Share

recognize compensation expense for performance-based options depends on

(a) initially on whether it's probable that the performance target will be met and (b) ultimately on whether the perfor- mance target actually is met

Some companies even encourage participation by matching or partially matching employee purchases. As long as

(a) substantially all employees can participate, (b) employees have no longer than one month after the price is fixed to decide whether to participate, and (c) the discount is no greater than 5% (or can be justified as reasonable), accounting is straightforward.

EPS calculation becomes more demanding when,

(a) when the number of shares has changed during the reporting period, (b) when the earnings available to common shareholders are diminished by dividends to preferred shareholders, or (c) when we attempt to take into account the impending effect of potential common shares

Estimating the fair value requires the use of one of several option pricing models

* 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.

Employee share purchase plans

0ften permit all employees to buy shares directly from their company at favorable terms. The primary intent of these plans is to encourage employee ownership of the company's shares

share-based compensation cost for RSUs is measured by?

A company usually uses the closing price from the fair market value when issuing share for compensation.

when options expire without being exercised. What happens to paid-in capital stock options?

Paid-in capital—stock options becomes paid-in capital—expiration of stock options

cliff vesting

The stock option plans (become exercisable) on one single date (e.g., four years from date of grant)

option pricing models

These are statistical models that use computers to incorporate informa- tion about a company's stock and the terms of the stock option to estimate the options'

give an example of graded vesting

a company might award stock options that vest 25% the first year, 25% the second year, and 50% the third year, or maybe 25% each year for four years.

Restricted stock units

a right to receive a specified number of shares of company stock. After the recipient of RSUs satisfies the vesting requirement, the company distributes the shares

estimate a single fair value for each of the options, even though they vest over different time periods by using

a single weighted-average expected life of the options. The company then allocates that total com- pensation cost (fair value per option times number of options) over the entire vesting period

Stock option plans give employees the option to purchase

a) a specified number of shares of the firm's stock, (b) at a specified price, (c) during a specified period of time

a stock dividend or a stock split is a

additional shares to existing shareholders

total compensation as estimated by the options' fair value is reported as

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

how is the weighted average calculated?

current outstanding shares + newly issued shares x time weighted average (# of months outstanding in a year/12 = rate %) = weighted average

discount to employees is considered to be compensation, and that amount is recorded as expense in what plan?

employee compensation purchase plan

The FASB consented to encourage, rather than require, that fair value compensation be recognized as

expense

measure compensation as the

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

awards specify that recipients gradually become eligible to exercise their options rather than all at once

graded vesting

Earnings per share

is the single accounting number that receives the most media attention.The reasons for the considerable attention paid to earnings per share certainly include the desire to find a way to summarize the performance of business enterprises into a single number.

how to calculate basic EPS?

is simply earnings available to common shareholders divided by the weighted-average number of common shares outstanding. Or Net income/outstanding shares=EPS

compensation associated with a share of restricted stock

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

if the number of shares has changed

it's necessary to find the weighted average of the shares outstanding during the period the earnings were generated

What is the different between RSU and RSA?

like restricted stock awards, the recipient benefits by the value of the shares at the end of the vesting period. Unlike restricted stock awards, though, the shares are not issued at the time of the grant.

how should employee compensation purchase plans record?

record the sale of new shares as employees buy shares and do not record compensation expense.

two primary stocks are?

restricted stock wards and restricted stock unit.

usually restricted stock subject to restrictions

shares are subject to forfeiture by the employee if employment is terminated. Required specified number of years in service from the grant date. Not free to sell the shares during restriction period and granted shares are considered certificates.

basic EPS

the calculation of EPS for a simple capital structure—when no potential common shares are present

The value of the award is expensed over the service period for which

the compensation is provided.

potential common shares

the new shares replaced by the converted bonds might participate in future earnings

the denominator of the EPS calculation is

the number of shares outstanding. But if the number of shares has changed, it's necessary to find the weighted average of the shares outstanding during the period the earnings were generated

intrinsic values

the simple difference between the market price of the shares and the option price at which they can be acquired. For instance, an option that permits an employee to buy $25 stock for $10 has an intrinsic value of $15

The time between the date options are granted and the first date they can be exercised is

the vesting period and usually is considered to be the service period over which the compensation expense is reported. The process is demon- strated in Illustration 19-3.

dilute means

to reduce earn- ings per share. For instance, if a firm has convertible bonds outstanding and those bonds are converted, the resulting increase in common shares could decrease (or dilute) earnings per share

How to calculate estimated forfeitures?

total compensation expense x (1-universal forfeiture estimated percentage rate) / years= compensation expense per year of service

Current GAAP now requires companies to record the

value of options in their income statements.