Ch 21: Share Based Compensation and EPS

certain employees receive compensation in a form other than cash as a way to encourage superior performance and retain and recruit employees

share based compensation plans

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

grant date

to earn the rights to; a share based payment award becomes vested at the date that the grantee’s right to receive or retain shares, other instruments, or cash under thee award is no longer contingent on satisfaction of either a service condition or a performance condition; market conditions are not ___ing conditions

vest

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

Requisite service period

is presumed to be the vesting period, unless there is clear evidence to the contrary

Requisite service period

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

vesting date

period from the grant date to the vesting date; typically the vesting period would align with the requisite service period

vesting period

stock issued at the grant date to an employee, but the employer holds the stock in trust through the vesting period; employee must satisfy vesting requirements in order to be awarded the stock

restricted stock SHARE award

awards that provide incentives to employees to act in the interest of the shareholders

Restricted stock plans (Share and Unit)

Entry to account for award of restricted stock SHARE awards

Compensation Exp (D)
Unearned Rev (C)

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

restricted stock UNIT awards

For Stock SHARE and UNIT awards, the JEs will NEVER include___ because you give stocks

cash

if the employee leaves the company before the the vesting period:

the shares are forfeited

restricted stock UNIT awards are valued at the

FV of compensation at the grant date

What JE is recorded on the grant date

NONE

What is the JE to award stock UNIT awards?

Compensation Exp and PIC- Restricted Stock (D)
CS and PIC-Restricted Stock and APIC-CS (C)

What are the two methods to account for forfeitures?

Estimate
As Incurred

to account for forfeitures using the estimate method, the FV of the reward is reduced at the grant date by the:

amount estimated to be forfeited

If the estimate changes (to account for forfeitures), the ___ of the change in estimate is recorded in the current period

cumulative effect

to account for forfeitures using the as incurred method, the record the forfeiture in the period incurred by:

reversing compensation exp previously recorded

form of share based compensation that gives employee a right to buy a specified number of shares at an established price

stock options

stock options are similar to call options because:

you have to BUY them

incentivizes the employee to increase the market price of stock (meaning they are short term focused)

stock options

stock options are measured at the cost of compensation at the FV of award at the grant date using:

option pricing model

the models to determine option pricing includes/has:

all market conditions baked in

What is the JE to account for stock options at the grant date

NONE

What is the JE to account for stock options at the end of each year?
expense the FV of options over the requisite service period

Comp Exp
PIC-Stock Options

unless otherwise stated, a call option that gives the holder the right to purchase shares of CS from the reporting entity in accordance with an agreement upon payment of a specified amount; include but are not limited to granted and stock purchase agreements entered into with grantees

option

considered securities

option

the amount that must be paid for a share of CS upon exercise or warrant

exercise price (strike price)

aka strike price

exercise price

Date that marks the point where the employee may no longer exercise the ward under a share based pmt

Expiration date

condition affecting the vesting, exercisability, exercise price, or other pertinent factors used in determining the FV of an award that relates to both of the following
a. Rendering service or delivering goods for a specified period of time
b. Achieving a specified performance target that is defined solely by reference to the grantee’s performance related to the grantors own operations

performance condition

For performance conditions, recognize compensation exp when it is:

probable that the performance condition will be met

revision of ___ estimate fully in the year of estimate revision

performance conditions

For ___ conditions, no adjustments to the fair value determined by the models are required

market conditions

JE to record exercise of stock options

Cash and PIC-Stock Options (d)
CS and APIC-CS (C)

JE to record expiration of stock options

PIC-Stock Options (d)
PIC- Expired Stock options (C)

performance obligation after employee retirement is recognized when comp determined that it is:

probable that condition is met (even if after retired)

allows employees the opportunity to purchase shares of stock of their employer at a discounted price

employee share purchase plan

for employee share purchase plans, no compensation exp is recorded when ALL 4 conditions are met. The four conditions are:

Terms of plan are no more favorable than those available to those of same class of shares
Any purchase discount is not significant (5% not, 10% is)
Substantially all employees may participate on equitable basis
Plan incorporates no option features, other than exceptions noted

If any of the conditions are not met for employee share purchase plan, the company must recognize compensation exp for the :

stock discount extended to employees

Basic EPS=

NI available to CS / Weighted Avg CS Out

amount of earnings for the period available to each share of CS outstanding during period

basic EPS

If the company incurs a net loss, then the company calculates EPS as:

net loss per share

Net income (loss) in EPS calculations exclude income (loss) attributable to:

any noncontrollling interest in subsidiaries

situation where SHE consists only of common stock with the existence of no financial instruments that could be converted into additional shares of common stock with a potential for dilution (decrease in EPS)

simple capital structure

Where is EPS shown in the financials?

I/S under NI with Diluted EPS

EPS given share issuances, buybacks, dividends, and splits are not simple because these change:

number of shares

For EPS (not simple), the numerator is the income available to CS, so ___ must be subtracted from NI

preferred dividends

only dividends declared for the current period are subtracted when PS is:

noncumulative

one years dividend claim is subtracted from NI, whether or not declared when PS is:

cumulative

shares issued and reacquired are weighted for the portion of the period they were outstanding when to calculate

WACSO

Stock dividends and splits do not generate additional capital for the company, so stock dividends and stock splits are treated as if they occurred:

at the beg of the earliest period presented

For EPS calcs, adjust the number of shares outstanding ___, even if the stock dividend or split takes place after the B/S date

retroactively

All EPS amounts show for the period just ended and for any ___ periods shown comparatively must reflect the stock dividend or split

previous

exists when a company owns financial instruments that have the potential to increase common shares, though exercise or conversion

Complex capital

Earnings available to each share of common stock outstanding during the period plus each dilutive potential common share outstanding

diluted EPS

a security that reduces EPS when incorporating the effects of an assumed conversion or exercise of common stock

dilutive security

a security that does NOT reduce EPS when incorporating the effects of an assumed convention or exercise of common stock

antidilutive security

antidilutive securities are ___ considered in diluted EPS calculation

NOT (they are in footnote)

financial instruments with the potential to convert to common stock (ex: bonds)

convertible debt

are the effects of convertible debts considered when computing diluted eps

Yes

used to determine whether convertible bonds are dilutive and if so to determine the impact on diluted EPS

if converted method

assumes a hypothetical conversion at the beg of period (or issue date if later) and determine whether diluted EPS is less than basic EPS

if converted method

To determine the effect on Diluted EPS calculation of convertible debt:

Add back interest (net of tax) to NI
Add new CS to CS out

financial instrument with the potential to convert to common stock (type of stock)

convertible preferred stock

Are the effects of a convertible PS considered when computing diluted EPS?

Yes

For convertible PS, use the___ to determine whether convertible PS is dilutive and if so, to determine effects

if converted method

How do you determine the effect on diluted EPS Calculation of convertible PS?

Add back PS to NI
Add new CS to CS out

In the case of a net loss from continuing operations, basic eps is negative, and including CS in denominator will always result in an anti-dilutive per share amount, therefore Diluted EPS=

Basic EPS