ACCT 328 - Chapter 21 Share Based Earnings Comp

Restricted Stock Plans

• Share based comp plans

• certain employees receive compensation other than cash

Grant Date

The date at which grantor and a grantee reach a mutual understanding of the key terms and conditions of a share based payment award

Vest

To earn the rights to a share based payment award becomes vested at the date that the grantees right to receive or retain shares, other instruments, or cash under that award is no longer contingent on satisfaction of either a service condition or a performance condition. Market conditions are NOT vesting conditions

Requisite Service Period

The period or periods during which an employee is required to provide service in exchange for an award under a share based arrangement. The service that an employee is required to render during the service period is referred to as the requisite service.

Vesting Date

Date that a share based compensation plan is exercisable by an employee

Vesting Period

Period from the grant date to the vesting date. Typically, the vesting period would align with the requisite service period

Restricted stock share awards

• stock issued at grant date by employee, but employer holds the stock in a trust through the vesting period

• if an employee leaves the company before the vesting period, the shares are forfeited

Accounting for restricted stock share awards

Compensation (Contra Equity) - at FV @ grant date

CS xx

APIC CS xx

then

Compensation Exp xx

Unearned compensation xx

Share awards are the only JE you make at what date??

Grant date!!

When shares are forfeited, how do you record unearned compensation

At FV of the common stock!!

UNIT Awards

• employer grants a right to an employee to receive a stock at a future date under certain conditions

• employees must satisfy vesting requirements

• FV of compensation expense is determined at GRANT DATE NOT THE JE THOOOO

To account for UNIT award JE

NO JE AT GRANT DATE

Compensation Expense xx

PIC restricted stock xx (over employee requisite service period)

then when stock is issues

PIC restricted stock xx

CS xx

APIC CS xx

Recording estimate of forfeitures

• FV of the award is reduced at grant date by the amount estimated to be forfeited

• if estimate changes, cumulative effect of the change in estimate is recorded in the CURRENT period

aka true up compensation expense during vesting period

Recording forfeitures as incurred

• record forfeiture in the period incurred by reversing compensation expense previously recorded

aka expense whole FV, then when it changes you “true it up”

Stock Options

• gives employee right to buy certain number of shares at an established price

• measure cost of compensation at FV!! at grant date using option pricing model

Accounting for stock options

At grant date: No entry but measure FV of options

Expense at FV of options over the requisite service period (UNLESS FORFEITED)

Option

gives holder right to purchases shares at a designated price

Exercise/strike price

The amount that must be paid for a share of common stock upon exercise of an option or warrant

Expiration date

date marking where the employee may nolonger exercise the award under a share-based payment

Performance conditions

• recognize compensation expense when it is PROBABLE that the performance condition will be met

• reflect revision to estimate in the period you know something changes

Market conditions

• share price models have already taken market factors(mkt price) into account

• No adjustment to FV determined by the models are required

• Company recognizes compensation exp as if there was no market condition target

JE for exercise of stock options

Cash xx

PIC stock options (plug)

CS xx

APIC xx

JE for expiration of stock options ON EXAM KNOW THIS!!!!

PIC stock options xx

PIC expired stock options xx

Employee share purchase plans

• allows employees to purchase shares of stock from employer at discounted price

• if conditions are NOT met, must record compensation expense

DO NOT record compensation exp for employee share plans if all conditions are met. What are they?

• terms of plan are no more favorable than those available to all holders in same class of shares

• any purchase discount is not significant

• substaintially all employees may participate on an equitable basis

• the plan incorporates no option features, other than exceptions noted

Significance test ON EXAM