FAR 2 Ch 19a conceptual

if the likelihood of meeting a performance target changes

-reverse expense previously recognized (debit PIC-stock options, credit compensation expense) -recognize expense previously unrecognized (debit expense, credit PIC- stock options)

accounting for share-based compensation

1. determine the fair value of the total compensation on the grant date 2. expense the compensation over the periods in which the employees perform the service (straight line)

RSUs

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; unlike restricted stock awards, the shares not issued at the time of grant

important to note that the way we account for stock options has no effect whatsoever on

cash flows, only on whether the value of stock options is included among expenses

fair value method

compensation expensed is determined as of the grant date based on the FV of options expected to vest; no adjustment for subsequent changes in value of stock options; FV vased on mathematical models (Black Scholes)

stock award plans

compensation for services in the form of stock

restricted stock plan

continued employment is required (vesting period), on the grant date, the company may retain the shares (RSUs) or issue the shares to the employees (restricted stock awards)-- the accounting is the same for both types

deferred compensation is the alternative approach to account for stock award plans

deferred comp is a CONTRA EQUITY account

stock options

employee has the option to buy set number of shares of stock over some specified future time period at a specified exercise price

non-compensatory plans

employee share purchase plans: enables employees to simply buy stock, rather than reward employees for services performed; open to most full time employees, discount from market price is small; no compensation expense is recognized for these types of plans; intent is to encourage employee ownership of the company's shares

FV based on mathematical models- underlying variables include..

exercise price, exercise period, current market price, stock price volatility, risk free rate of return, expected dividends

compensation expense should be adjusted to reflect

expected forfeitures; forfeitures occur if employees leave the company before their vesting period ends

stock options dates

grant date- options are awarded to the employee (no entry) vesting period- service period before option can be exercised (incentive for employees to stay with the company longer) exercise period- employee may buy shares at pre-specified exercise price within this window expiration date- option to buy shares terminate

stock award plan dates

grant date- stocks granted to employees vesting period- employees cannot sell. if they leave the company, they forfeit shares vesting date- employees now own the shares outright (can sell if they want) *restricted stocks not included in shares outstanding, don't have the full ownership, no rights to sell during the vesting period

restricted stock units can also be settled in cash rather than in shares of stock

if so, record as a liability (debit expense, credit payable?) rather than equity (debit expense, credit PIC); continue to recognize compensation expense over the service period; the liability must be adjust to fair value at each reporting date until it is paid

usually exercise price=market price at grant date, so

intrinsic value= 0 which is why intrinsic value method is not used

restricted stock awards

shares are actually awarded in the name of the employee, although the company might retain physical possession of the shares, the employee has all rights of a shareholder subject to certain restrictions or forfeiture; once the shares vest and the restrictions are lifted, PIC-restricted stock is replaced by common stock and PIC- excess of par; any market changes that might occur after that don't affect the total compensation

in addition to salaries, companies often compensate employees with

shares of stock or other forms of share-based compensation (e.g. options) to motivate managers and other to ac int he best interest of shareholders; share based compensation can be huge relative to other forms of compensation

major debate surrounded expense recognition of options

should company recognize compensation expense over service period? how much? FASB requires FV approach, eliminates intrinsic value method

performance stock option plans

sometimes options are contingent on future performance (individual must meet sales or profit targets in order to exercise stock options); company must first assess the likelihood that performance target will be met- is it probable? if yes, recognize expense. if no, don't recognize expense.

stock option measurement date

the grant date of the stock option plan

compensation expense is based on

the market value of the shares on the grant date and is allocated over the besting period on a straight-line basis

share based awards are forms of payment whose value is dependent on

the value of the company's stock- these may be outright awards of shares, stock options, or cash payments tied to the market price of shares

when the expiration date is reach, outstanding options become

worthless. any remaining balance in PIC- stock options account is closed out (debit) with the offsetting credit to PIC- expired stock options; no adjustment is made to compensation expense for expired options