Fin Acct 2 Ch 19

Accounting objective for share-based compensation

• determine the fair value of the compensation

• expense compensation over the periods in which participants perform the related services

restricted stock plans

tied to continued employment

Restricted stock awards

restrictions: cannot be freely sold until vested, possession is retained by the company in escrow during vesting period, subject to forfeiture of employment ends within a certain period.

Restricted stock plans grant date journal entries

Grant date:

Dr. deferred compensation — contra equity

Cr. common stock (excess of par * Q)

Cr. paid-in capital (par * Q)

→ no SE effect on grant date

Adjustment to expense

Dr. Compensation expense (deferred comp/vesting period)

Cr. Contra equity deferred compensation

restricted stock awards

Gives stocks to recipient on grant date, but restricts their sale. RSU’s dont give stock until end of vesting period— it is unfunded.

on grant date, total compensation = fair value of compensation.

$12 price * 5 million shares = $60m

then expense 60m over the four year vesting period

vesting period

period of time that employee is subject to forfeiting stock awards if employment is terminated

restricted stock units

Only given at end of vesting period. right to receive a specified number of shares. distributes the shares after the recipient satisfies vesting requirement.

RSU grant date

Grant date: no entry. no shares were issued.

Accrue expense:

Dr. Compensation expense (FMV at grant date / vesting)

Cr. Paid-in capital— restricted stock

FInal entry after you have accrued all 4 years:

Dr. Paid in capital (entire amount of FMV at grant)

Cr. common stock (total par)

Cr. Paid in capital (entire excess of par)

record comp expense through paid in capital. at the end, take all out of paid in capital, then divide again through common stock par and paid in capital — excess of par.

stock option plans

gives recipient right to purchase a share at a fixed price for a specified period of time.

→ measure compensation by FMV at grant date

→ record that FMV over the period where the employee receives the options

vesting period is before or after vesting date?

before

Stock options journal entry

every year of vesting period until vesting date:

Dr. compensation expense (FMV at grant/vesting period)

Cr. Paid-in capital — stock options

IF theres expected forfeitures, reduce the above entry by the proportion expected to be forfeited each year.

if you have to revise expected forfeitures, frontload the correction to the next entry to correct for previous years

when options are exercised:

Dr. Cash (exercise price *Q)

Dr. paid-in capital — stock options (plug)

Cr. common stock — par

Cr. paid in capital— excess of par

When options expire:

Dr. paid-in capital — stock options

Cr. paid-in capital — expiration of stock options

cliff vesting vs graded vesting

cliff: options vest on one date

graded: options vest gradually

plans with performance conditions

account according to likelihood that performance is met. If you adjust it, then frontload the corrections

plans with market conditions

account as normal, as the FV reflects the market conditions.

employee share purchase plans

under certain conditions, do not record all of it as compensation expense. just record as a discounted sale.

Dr. cash

Dr. Compensation expense (discount)

Cr. Common stock (Market value)

basic eps where number of shares changes during year

net income /(weighted average # of shares by portion of year outstanding + 1.%dividends paid)

complex capital structure

has outstanding dilutive securities that could dilute EPS. diluted EPS assumes maximum potential dilution

do you subtract preferred dividends from eps numerator

yes