Chapter 19: Share-Based Compensation and Earnings Per Share Flashcards

Comprehensive vocabulary flashcards covering share-based compensation plans (RSAs, RSUs, options, SARs) and the calculation of Basic and Diluted Earnings Per Share (EPS) based on Chapter 19 study notes.

Share-based awards

Forms of payment whose value depends on the company's stock price, including stock awards and stock options.

Restricted Stock Awards (RSAs)

Plans where shares are issued on the grant date but held in escrow; they are subject to forfeiture if employment ends before the vesting period is complete.

Restricted Stock Units (RSUs)

A right to receive shares where no shares are issued at the grant date; they are distributed only when vesting requirements are met.

Deferred compensation

A contra-equity account used in the journal entry for Restricted Stock Awards (RSAs) that nets to zero effect on shareholders' equity at the grant date.

Forfeitures

When shares or options are lost because an employee leaves the company; compensation expense is decreased in the year this occurs.

Stock option

A grant that gives the recipient the right to purchase a share of stock at a fixed exercise price for a specified period.

Black-Scholes

An example of an option pricing model used to measure the fair value of stock options.

Cliff Vesting

A vesting schedule where all options or shares vest on a single specific date.

Graded Vesting

A vesting schedule where options or shares vest gradually over time, such as $25\%$ per year for 4 years.

Performance condition

A target such as sales growth or an EPS goal that determines whether compensation is recognized based on the probability of meeting the target.

Market condition

A target based on stock price; since option pricing models implicitly reflect these, expense is recorded as if no target exists regardless of the outcome.

Employee Share Purchase Plans (ESPPs)

Plans allowing all employees to buy company shares directly at favorable terms, typically without brokerage fees and at a discount.

Noncompensatory ESPP

An employee share purchase plan that meets three criteria: substantially all eligible employees participate, a short enrollment window, and a discount no greater than $5\%$.

Simple Capital Structure

A structure with no potentially dilutive securities, such as convertibles or options, requiring the report of Basic EPS only.

Complex Capital Structure

A structure that includes dilutive securities that could become common shares, requiring the report of both Basic and Diluted EPS.

Basic Earnings Per Share (EPS)

Calculated as $(Net Income - Preferred Dividends) \div Weighted-Average Common Shares Outstanding$.

Weighted-Average Common Shares

The denominator for EPS where shares are time-weighted by the fraction of the year they were outstanding and adjusted retroactively for stock dividends or splits.

Stock Dividend Rule

The requirement to treat stock dividends or splits as if they occurred at the beginning of the year, retroactively adjusting all prior shares.

Diluted EPS

A calculation showing the 'worst-case' EPS if all dilutive potential common shares were converted or exercised.

Antidilutive security

Any security whose conversion or exercise would increase EPS; these are excluded from the Diluted EPS calculation.

Treasury Stock Method

A method used for options and RSUs in Diluted EPS that assumes exercise proceeds are used to repurchase treasury shares at the average market price.

If-Converted Method

A method used for convertible bonds and preferred stock in Diluted EPS that assumes conversion occurred at the beginning of the year.

Incremental Effect Test

A test for convertibles where $(numerator addition) \div (denominator addition)$ is compared to Basic EPS to determine if the security is dilutive.

Contingently Issuable Shares

Shares issuable upon meeting future performance conditions; they are included in Diluted EPS only if the condition is currently being met.

Intrinsic Value

The benefit from exercising an option now versus buying the stock directly, calculated as stock price minus exercise price.

Time Value (Option)

The value derived from not having to pay the exercise price yet and the potential for future stock appreciation; includes the time value of money and volatility value.

Volatility Value

The component of an option's value reflecting that potential gains are unlimited while losses are capped at the option's cost.

Stock Appreciation Rights (SARs)

Awards that allow employees to receive an amount equal to the market price appreciation of a stock without actually buying shares.

Liability SARs

SARs payable in cash where the fair value is re-estimated at each period-end and the cumulative liability is adjusted using a catch-up approach.