FI 15 Share based payments

Question 1

Use of share-based payments

Answer 1

Flexible way for employees to own shares in order to motivate, align interest and reward employees for stock price performance

Question 2

Three types of share-based payments

Answer 2

ESO’s
RSU and PSU
SAR

Question 3

Two types of ESO’s settlements

Answer 3

Equity or cash

Question 3

Two types of ESO’s settlements

Answer 3

Equity or cash

Question 4

ESO Equity - impact for employee when exercised

Answer 4

Employee receives stock at exercise price. Can then sell at market price to recieve difference or keep them.

Question 5

ESO cash - impact for employee when exercised

Answer 5

Employee receives cash for shares at market price - exercise price

Question 6

ESO risk for employee for both equity and cash

Answer 6

Stock never goes above exercise price and options are worthless

Question 7

ESO equity

Answer 7

receives cash from employee and gives out stock

Question 8

ESO cash - impact on company

Answer 8

company pays out cash

Question 9

ESO Equity accounting impact

Answer 9

DR comp expense, CR equity over vesting period AT FAIR VALUE OF STOCK. Adjusted if employee leaves during vesting period.

Question 10

ESO Cash accounting impact

Answer 10

DR comp expense, CR liability over vesting period @ FAIR VALUE OF STOCK. Adj to FV over vesting period until it matches final settlement amount.

Question 11

Define RSU’s and PSU’s

Answer 11

A promise by the employer to issue a certain number of shares once certain vesting conditions have been met

Question 12

Vesting conditions for RSU’s

Answer 12

solely based on continuing employment over a period of years

Question 13

Vesting conditions for PSU’s

Answer 13

achievement of pre-established performance goals.

Question 14

RSU/PSU equity impact for employee after vesting period

Answer 14

Receives shares at market value

Question 15

RSU/PSU cashimpact for employee after vesting period

Answer 15

employee receives cash equivalent to shares @ market value

Question 16

RSU/PSU risk for employee for both equity and cash

Answer 16

Share price dictates amount of pay-out

Question 17

RSU/PSU equity impact on company

Answer 17

company issues shares

Question 18

RSU/PSU cash impact on company

Answer 18

company pays out cash

Question 19

RSU/PSU equity accounting impact

Answer 19

DR comp expense, CR equity @ FAIR VALUE over vesting period.

Question 20

RSU/PSU cash accounting impact

Answer 20

DR Comp expense, CR liability @ FV. Adj over course of vesting period until it matches payout ont he date.

Question 21

Define SAR’s

Answer 21

A form of compensation based upon stock being higher than a benchmark price over a period of time.

Question 22

SAR equity - impact for employee after vesting period

Answer 22

Receive shares equivalent to following:

- (market price - benchmark price) x # of shares / market price

Question 23

SAR cash - impact for employee after vesting period

Answer 23

Receive cash equivalent to (market price - benchmark price) x # of shares

Question 24

SAR’s downside risk for both equity and cash

Answer 24

Fall below benchmark rate and are worthless

Question 25

SAR equity impact on company

Answer 25

Issue shares

Question 26

SAR cash impact on company

Answer 26

Issue cash

Question 27

SAR equity accounting treatment

Answer 27

Over vesting period, DR comp expense, CR equity (@ FV)

Question 28

SAR cash accounting treatment

Answer 28

over vesting period, DR Comp exp, CR liability. Adjusted to FV until payment date.

Question 29

Intrinsic value of the option

Answer 29

Market price - exercise price

Question 30

Intrinsic values of ESO, RSU and SAR

Answer 30

ESO - share price - exercise price
RSU - share price
SAR - share price - benchmark price

Question 31

Objectives for using share-based compensation

Answer 31

• align employees and shareholders interests
• attract and retain key personnel
• reduce amount of cash required to pay for total compensation
• be more tax efficieint

Question 32

What do startups use? larger companies?

Answer 32

ESO

ESO/RSU/PSU and SAR’s

Question 33

Equity vs cash settlement

Answer 33

Equity is attractive when:

• company is growing with little cash
• amount of comp expense is set at time of grant and only changes for forfeitures)

Cash is attractive when:

• existing shareholders do not want to dilute their holdings
• company can use a tax deduction

Question 34

Disadvantages of stock-based comp

Answer 34

• can encourage risk-taking behaviour by managers to increase share price
• can dilute ownership and value for existing shareholders

Question 35

Other considerations

Answer 35

Dilution
S& G - laws/discloures etc
Income tax

Question 36

How are share-based payments to non-employees recognized

Answer 36

FV of services or goods received at date they are provided to the company.