FAR - Financial Statement Acct - Stock Compensation (Share Based Payments) Flashcards
Stock Options
Mgmt allowed to purchase employer’s stock at fixed price after providing services
Grant Date
Vesting Date
Service Period
Exercise period
When mgmt is awarded the option (total comp exp determined)
When mgmt can begin to exercise the option
from Grant Date to Vesting Date
after vesting date, period during which the option can be exercised
Compensation Expense
(recognized during service period- updates when forfeiture rate changes & affects expense for the current period )
FV of options expected to be exercised
FV measured @ grant date using pricing model
Amortized SL over service period
Value to mgmt
Value to firm
Stock price may rise above option during exercise period
incentive generated for mgt to work hard
Change in Est. Forfeitures
Update total compensation expense when forfeiture rate changes (change applied to current period for expense)
No retroactive application
Usually reduce compensation expense
Expiration of Options
expire if stock price fails to rise above exercise price
- no retroactive adj. for exp.
- comp exp remains but PIC-stock options is transferred to PIC-expired stock options
Performance (variable) Plans
require performance target to be met before vesting
“variable/performance” b/c 1/+ terms is not set @ grant date
incentives: increase # of shares/reduction in option price
Adj. in expected # of shares = handled same way as forfeiture changes
recompute compensation expense for the current period based on target levels achieved
Expiration
does not call for reversal of expense (for performance, opposite is true)
if no options vest b/c min. incentive level isn’t met, reverse previously recognized expense.
Firm ultimately gave nothing to manager
When stock options aren’t vested b/c performance target is not expected to be met…affect on compensation expense?
compensation expense/owner’s equity reversed
Stock award
stock awarded for continuing employment, employee cannot sell stock until award is vested
Stock award - compensation expense
fair value of stock grant date, number of shares awarded X market price of stock
Expense & PIC is recognized over the service period
Stock awards - service period
vesting/service period can be 1/more years
Stock award - forfeiture
if employee doesn’t continue employment through vesting date, expense recognized on awards is reversed, effect is to reduce compensation expense in current yr by amount of expense recognized in prior yrs.
Reversal recorded b/c stock is taken back = treated as an estimate change, retroactive application isn’t necessary.
Stock awards - net effect on account
expense = stock value @ grant date is recognized
contributed capital increases
retained earnings decreases
No net effect on OE
Deferred Compensation Expense
Contra OE
Net method, what acct is credited to recognize comp. exp?
Gross method, what acct is credited to recognize comp. exp?
PIC-restricted
Deferred Comp. Exp.
2 methods of recording compensation expense for stock awards
1) net method
2) gross method
stock award - multiple awards, treat compensation expense?
treat as separate awards and combine the amortization to get the period’s compensation expense
Stock Appreciation Rights (SAR)
employee receives stock/cash as part of the difference between stock price @ grant date and stock price @ exercise date, while employee pays nothing
Stock Appreciation Rights - type of awards
1) cash - recorded as liab
2) stock - acct’d for using stock option plan
Liability - classified SARS payable in cash
FV of SAR is re-estimated annually @ exercise date
Estimated forfeitures included in in total compensation expense
Compensation expense recorded each yr (SL basis) using catch-up method for changes in est. forfeitures
SAR payables
number of options multiply difference between stock price at grant date & exercise date
account is credited when periodic compensation expense is recognized for an SAR payable in cash?
SAR Liability
When can compensation expense be negative for a period?
when stock price falls lower than price at grant date causing a reversal in compensation expense
Compensation Expense
Total compensation expense is the product of the number of shares in the award and the market price of stock at the grant date. This amount is recognized over the service period required for the employee to receive or keep the shares.
