ASC 718 Flashcards
What is a Contract?
An agreement between two or more parties that creates enforceable rights and obligations.
What is a Zero-Coupon Bond?
A zero-coupon bond, also known as an accrual bond, is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.
What is the effective interest rate for a bond?
The effective interest rate of a bond is the rate that will discount both the bond’s future interest payments and the bond’s maturity value to a present value that is equal to the bond’s current market value. If the market interest rate increases, the present value (and the market value) of the bond will decrease. If the market interest rate decreases, the present value (and the market value) of the bond will increase.
Diluted EPS
Diluted EPS is a calculation used to gauge the quality of a company’s earnings per share (EPS) if all convertible securities were exercised. Convertible securities are all outstanding convertible preferred shares, convertible debentures, stock options, and warrants.
Dilutive EPS Formula = Net Income-Preferred Dividends / WASO +Conversion of Dilutive Securities
What is the Treasury Stock Method for calculating Dilutive EPS?
A way for companies to calculate how many additional shares may be generated from outstanding in-the-money warrants and options. The new additional shares are then used in calculating the company’s diluted earnings per share (EPS).
What is a Blackout Period?
A period of time during which exercise of an equity share option is contractually or legally prohibited.
Call Option
A contract that allows the holder to buy a specified quantity of stock from the writer of the contract at a fixed price for a given period.
Convertible Security
A security that is convertible into another security based on a conversion rate. For example, convertible preferred stock that is convertible into common stock on a two-for-one basis (two shares of common for each share of preferred).
Measurement Date
The date at which the equity share price and other pertinent factors, such as expected volatility, that enter into measurement of the total recognized amount of compensation cost for an award of share-based payment are fixed. - J&J Measurment Date is the grant date.
Settlement of an Award
An action or event that irrevocably extinguishes the issuing entity’s obligation under a share-based payment award. Transactions and events that constitute settlements include the following:
a) Exercise of a share option or lapse of an option at the end of its contractual term
b) Vesting of shares
c) Forfeiture of shares or share options due to failure to satisfy a vesting condition
d) An entity’s repurchase of instruments in exchange for assets or for fully vested and transferable equity instruments.
The vesting of a share option is not a settlement because the entity remains obligated to issue shares upon exercise of the option.
Time Value
The portion of the fair value of an option that exceeds its intrinsic value. For example, a call option with an exercise price of $20 on a stock whose current market price is $25 has intrinsic value of $5. If the fair value of that option is $7, the time value of the option is $2 ($7 - $5).
Options or similar instruments on shares shall be classified as liabilities if either of the following conditions is met:
a) The underlying shares are classified as liabilities.
b) The entity can be required under any circumstances to settle the option or similar instrument by transferring cash or other assets. A cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the grantee’s control (such as an initial public offering) would not meet this condition until it becomes probable that event will occur.
