B4-M3 Stock Compensation

Question 1

What are the type of employee stock options?

Answer 1

1. Non compensatory - no expense recorded
2. Compensatory - expensed

Question 2

What is the entry to record non compensatory stock option?

Answer 2

No entry until employee buys the stock

Question 3

How are stock options valued?

Answer 3

Stock options are valued at the fair value (at grant date) of the options issued and not affected by subsequent changes in fair value.

Question 3

What is the entries to record compensatory stock option?

Answer 3

1. Grant Date – date issued = date valued (No JE)
2. Compensation Expense –FMV of options @ grant date allocated per year over the vesting period

Dr. Compensation expense
Cr. APIC - Stock options

3. Exercise date -

Dr. Cash (at Strick price)
Dr. APIC stock option (reverse all previously recognized over vesting)
Cr. Common Stocks (at Par value)
Cr. APIC (squeeze)

4. If not exercise / expired options

Dr. APIC stock option (reverse all previously recognized over vesting)
Cr. APIC - Expired Stock options

Question 4

What are Stock appreciation rights (SARs)?

Answer 4

Unlike stock options, SARs don’t require the employee to make a cash payment.

For accounting purposes, you only need to accrue for the “appreciation” of the stocks from Grant date until the exercise date. Appreciate difference is for the full duration and is allocated within the vesting period.

Ex. FV is 45 at Yr2, FV is 30 at Y1 – difference is accrued but is allocated to the service/vesting period (ex. 2 years). So expense after one year is only $7.5.

FV at yr 3 is 40, FV is 30 at Y1 - Difference is now only 10 (for the whole duration). Since you already recorded $7.5 in the first year, 2nd year should only record $2.5.

Any changes to the FV will be adjusted “prospectively” to the accrued liability balance.