Stock Compensation pg 503-

Question 1

Noncompensatory Plans

Answer 1

• Employees purchase stock directly from firms, may receive small discount and employer may match portion of purchase–No significant compensation is provided if:
  1. Essentially all employees can participate
  2. Employee must decided w/in 1 month of firm setting price for stock whether to enroll in plan
  3. Discount doesn’t exceed employer cost savings < 5% market price meets criterion
  4. Purchase price must be based solely on market price of stock
  5. Employees can cancel enrollment before purchase date and obtain full refund

-If Noncompensatory shares recorded as any other stock issuance. Only exp is portion pd for by firm (if any)

Question 2

Compensatory Plans

Answer 2

If not all 5 criteria met, plan is compensatory. Amt not meeting criteria is recorded @ expense

Question 3

Stock Option Plan

Answer 3

Value of grant stems from potential for stock price to increase. Ability of employees to influence stock price provides incentive

Question 4

Service Period/Vesting Period/Amortization Period

Answer 4

• Period in time after stock option granted and before stock option can be exercised
• Compensation exp recognized
• options vest @ end of this period (no longer contingent on continued employment)

Question 5

Fixed Plan for Stock Option Plan

Cliff Vesting for Stock Option Plan

Answer 5

• Called Fixed bc relevant terms are set @ grant date

- Cliff Vesting bc all options vest @ same time

Question 6

Measuring Compensation Exp

Answer 6

-More reliable of 1) Value of employee services to be received OR 2) value of options provided
-Value of employee services cannot be directly measured THEREFORE FV of options granted must be estimated using an option-pricing model
-If stock options vest immediately @ grant then entire compensation exp measured by FV is recognized immediately
-Compensation Exp reported as component of income from continuing operations (mfg firm may portion to Inv then COGS)
-Comp Exp reduces Retained Earnings @ exercise
> RE converted into permanent capital for amt FV of option,firm increases permanent value by value of manager’s services

Question 7

Forfeitures

Answer 7

If change is forfeitures no retroactive application, Yr changes occur in is catch up adjustment

Question 8

Stock Award Plans

Answer 8

-Stock awarded for cont employment but employee cannot sell stock until award is vested and employee may not receive shares until vested, however employee acquires normal rights of shareholders at grant

Question 9

Total Compensation Exp for Stock Award Plans

Answer 9

= # of shares awarded * market price of stock @ grant
Amt recognized as expense over period employee provides service for which grant was awarded. when vested expensing is complete
-If forfeiture expense is reversed in current yr and is treated as estimate change and retrospective application is not permitted

Question 10

Stock Appreciation Rights

Answer 10

-Differ from stock option plans 1) employee receives difference b/w stock price @ grant date and stock price @ exercise date 2) pays nothing 3) SAR specifies pmt of benefit in either cash or stock

Question 11

Options under Stock Appreciation Rights

Answer 11

• If SAR plan allows employer to issue stock SAR acct for as stock option plan. FV of SAR estimated @ grant date and total FV allocated to compensation exp over service period
• If SAR plan specifies pmt in cahs or allows employee to choose cash pmt:
  
  1. Firm records liability rather than PIC when compensation exp recognizec
  2. Each yr in service period, FV of each right is re estimated in light of new info using option pricing model
  3. Compensation Exp recorded each yr based on FV @ end of period, for portion of service period elapsed using catch up procedure for stock option. Exp recognition continues through exercise date
  4. Expected forfeitures built into calculation of total compensation exp
  5. @ exercise date, FV SAR = diff b/w price @ grant date and price pd for stock