Stock Appreciation Rights

Question 1

Types of Questions:

Answer 1

• Terminology
• Compensation Expense
• Impact on Financial statements

Question 2

What is a stock appreciation right?

Answer 2

Stock based compensation plan based on the increase in stock price over a period years. Employee is going to receive compensation equal to amount of increase.

If cash is to be paid or if a manager can elect to receive cash, a liability is created rather than APIC

Question 3

How do you account for a stock appreciation right?

Answer 3

If cash is to be paid or if a manager can elect to receive cash, a liability is created rather than APIC

If the plan provides employee stock, then the SAR plan is accounted for as a stock option plan using fair value.

Question 4

How do you account for Liaiblity- Classified SAR each year?

Answer 4

Each year through the exercise date, the fair value of the SAR is re-estimated.

Estimated forfeitures are included in the computation of total compensation expense.

Compensation expense is recorded on SL Basis using catch-up procedure for changes in forfeitures.

At exercise, the SAR fair value equals the difference between the stock price at grant date and at exercise date- the amount of cash paid.

Question 5

EXAMPLE: ASSUME ON JANUARY 20X1, STIRLING GRANTED IT’S EMPLOYEES 10,000 CASH STOCK APPRECIATION RIGHTS (SARS).

THE CASH SAR PAYS THE AMOUNT EQUAL TO THE MARKET VALUE OF STIRLING’S STOCK ABOVE $50, GRANTED DATE MARKET PRICE.

SERVICE PERIOD IS 3 YEARS AND A ONE YEAR EXERCISE PERIOD FOLLOWS THE SERVICE PERIOD.

STIRLING’S SHARE PRICE:

JANUARY 1, X1         $50
DECEMBER 31, X1    $56
DECEMBER 31, X2:  $57
DECEMBER 31, X3:  $59 
DECEMBER 31, X4:  $61

Answer 5

December 31. X1

Compensation Expense          $20,000
SAR Liability                             ($20,000) 

December 31. X2
Compensation Expense $26,667
SAR Liability (26,667)
(10,000 X (57-50)= 70,000 (2/3) = $46,667
46,667-20,000= $26,667

December 31. X3
Compensation Expense  $43,333
SAR Liability                     $43,333 
(10,000 X (59-50) = $90,000
90,000 - 46,667 = 43,333 

December 31. X4 (have to record the incramental period in compensation expense)

DR: Compensation Expense $20,000
CR: SAR Liability ($20,000)
(10,000 X (61-59) = $20,000

Question 6

What if the stock value fell to $58 on December 31. X4, how would we treat that?

Answer 6

SAR Liability $10,000
Compenastion expense $10,000

SAR Liability $80,000
Cash ($80,000)