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