Stock Based Compensation

If during year 3 the estimate changes from 25% forfeitures to 20% forfeitures, we make the following entry in year 3:

- 8 million total compensation expense x (1-.20) = 6.4 million total - since 3 out of 4 years have passed, we need 4.8 million (3/4 of 6.4 million) of compensation expense recorded by the end of year 3. Since we recorded 1.5 million each in years 1 and 2 the journal entry for year 3 is Compensation expense 1.8 APIC - stock options 1.8

ABC grants 1 million options to executives with a fair value of 8 per option and a 4 year vesting period

- Each year the following entry will be made - Compensation expense 2,000,000 APIC - stock options 2,000,000 - if we expect 25% of options not to vest, we make the following entry each year instead: - compensation expense 1,500,000 APiC - stock options 1,500,000

Cash settled SARs

- If the sar will be settled in cash, the value is initially measured the same way, but the sar grant is recorded as a liability (credit to SAR instead of apic - sar) - because the liability will be settled in cash, we must revalue the sar each year and make a journal entry that reflects the change in fair value of the sar until they are either exercised or expire unexercised - accounting for restricted stock settled in cash works the same wag

Restricted stock

- If the stock is restricted, the journal entry depends on the restriction. - the most common restriction is a beating period (the employee will only be able to sell the stock if they continue work for the company for some period of time - in the case of such a restriction, the compensation expense is recorded over the vesting period (usually straight line) Dr. Compensation expense (value at grant/vesting period) Cr. APiC - restricted stock (same amount) - when the stock vests, APIC - restricted stock is replace with common stock and APIC Dr. APIC - restricted stock Cr. Common Stock Cr. APIC - common

Stock appreciation rights

- function like stock options (the employee receives the difference in the stock price and a pre determine exercise price at the exercise date). - they may be better than options in the sense that employers do not have to actually buy shares of stock as they do when stock options are exercised. They simply receive the difference in value either cash or shares of stock

Restricted stock units

- function similarly except that shares are not actually issued until they vest - accounting depends on whether they are settled in stock or cash

Stock options and warrants

- give the holder the right, but not obligation, to purchase a specified number of shares at a pre set price until the option expires

What is the journal entry if the options expire unexercised?

APIC - stock options APiC - expired stock options

Restricted stock units settled in stock

Accounting the same as restricted stock

Suppose all 1 million options in the previous example are actually exercised at an exercise price of 15 when the stock is worth 25. The stock has a 1 par value. What is the journal entry?

Cash 15,000,000 APIC - stock options 8,000,000 Common stock 1,000,000 Apic - common 22,000,000

Journal entry for stock settled SAR

Compensation expense APIC - SAR

Journal entry for cash settled SAR

Compensation expense SAR liability

When the stock is at vesting, what is the journal entry?

Dr APIC - restricted stock Cr common stock Cr APiC - common stock

If the stock is restricted and there is something like a vesting period, the journal entry every year is

Dr compensation expense (value/vesting period) Cr apic - restricted stock

Stock appreciation rights example

If Sarah receives 100 SARs with an exercise price of 15 and exercises them all when the stock is worth 25, she will either receive 1000 cash (100*(25-15)) or 1000 worth of stock

Option forfeiture revisions

If the expected forfeiture amount changes, we update the expense in the year of the change

Stock grants

If the firm gives an employee shares of stock, the firm must record compensation expense for the FMV of the shares. If the stock is unrestricted (owned free and clear with no additional requirements), the full compensation expense is recognized on the grant day. Dr. Compensation expense Cr. Common stock Cr. APIC

Option expiration

If the options expire un exercised (because the stock price was below the exercise price) then we simply reclassify the paid in capital Dr. Apic - stock options 8 million Cr. Apic - expired options 8 million

Stock settled SARs

If the sar is settled in stock, accounting is very similar to stock options - the fair value is estimated at grant date using an option pricing model and is recorded as compensation expense over the vesting period. The credit is to apic - sar

What is the journal entry for when a restricted stock or RSU is forfeited?

Opposite of normal Dr. APIC - restricted Cr. Compensation expense

Stock based compensation includes many forms

Stock grants (unrestricted), restricted stock grants, phantom stock/restricted stock units, stock options/warrants, stock appreciation rights: settled in stock or cash, employee share ownership plans (ESOPs), employee share purchase plans (ESPOs)

Option exercise

Suppose all 1 million options in the previous example are actually exercised at an exercise price of 15 when the stock is worth 25, the stock has a 1 par value We record as follows: Dr cash 15 million Dr APIC - options 8 million Cr common stock 1 million Apic - common 22 million

Restricted stock units settled in cash

The credit will be to a liability instead of to stockholder's equity

Vesting period

The employee will only be able to sell the stock if they continue work for the company for some period of time

If the firm gives stock options to an employee

The firm must record compensation expense based on the fair value of the options at the grant date. - dr. Compensation expense Cr. Apic - options - if the options vest immediately, the full compensation expense is recognized on the grant day - if the stock options have a vesting period, the compensation expense is recognized over that period

For both restricted stock and RSU's

They can be forfeited if the employee does not meet the vesting period (or other restriction). When this happens, the journal entries to record the compensation expense are reversed. Dr. Apic Cr compensation expense

If they can't reasonably estimate the options that will vest

They simply account for forfeited options in the year the forfeiture happens

If companies can reasonably estimate the options that won't vest

They take the expected option vesting into account as they record the expense each year