FAR - Financial Statement Acct - Stock Compensation (Share Based Payments)

Question 1

Stock Options

Answer 1

Mgmt allowed to purchase employer’s stock at fixed price after providing services

Question 2

Grant Date

Vesting Date

Service Period

Exercise period

Answer 2

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

Question 3

Compensation Expense

Answer 3

(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

Question 4

Value to mgmt

Value to firm

Answer 4

Stock price may rise above option during exercise period

incentive generated for mgt to work hard

Question 5

Change in Est. Forfeitures

Answer 5

Update total compensation expense when forfeiture rate changes (change applied to current period for expense)

No retroactive application

Usually reduce compensation expense

Question 6

Expiration of Options

Answer 6

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

Question 7

Performance (variable) Plans

Answer 7

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

Question 8

Expiration

Answer 8

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

Question 9

When stock options aren’t vested b/c performance target is not expected to be met…affect on compensation expense?

Answer 9

compensation expense/owner’s equity reversed

Question 10

Stock award

Answer 10

stock awarded for continuing employment, employee cannot sell stock until award is vested

Question 11

Stock award - compensation expense

Answer 11

fair value of stock grant date, number of shares awarded X market price of stock

Expense & PIC is recognized over the service period

Question 12

Stock awards - service period

Answer 12

vesting/service period can be 1/more years

Question 13

Stock award - forfeiture

Answer 13

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.

Question 14

Stock awards - net effect on account

Answer 14

expense = stock value @ grant date is recognized

contributed capital increases

retained earnings decreases

No net effect on OE

Question 15

Deferred Compensation Expense

Answer 15

Contra OE

Question 16

Net method, what acct is credited to recognize comp. exp?

Gross method, what acct is credited to recognize comp. exp?

Answer 16

PIC-restricted

Deferred Comp. Exp.

Question 17

2 methods of recording compensation expense for stock awards

Answer 17

1) net method

2) gross method

Question 18

stock award - multiple awards, treat compensation expense?

Answer 18

treat as separate awards and combine the amortization to get the period’s compensation expense

Question 19

Stock Appreciation Rights (SAR)

Answer 19

employee receives stock/cash as part of the difference between stock price @ grant date and stock price @ exercise date, while employee pays nothing

Question 20

Stock Appreciation Rights - type of awards

Answer 20

1) cash - recorded as liab

2) stock - acct’d for using stock option plan

Question 21

Liability - classified SARS payable in cash

Answer 21

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

Question 22

SAR payables

Answer 22

number of options multiply difference between stock price at grant date & exercise date

Question 23

account is credited when periodic compensation expense is recognized for an SAR payable in cash?

Answer 23

SAR Liability

Question 24

When can compensation expense be negative for a period?

Answer 24

when stock price falls lower than price at grant date causing a reversal in compensation expense

Question 25

Compensation Expense

Answer 25

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.