Stock Options Flashcards
In a stock option plan, the estimated forfeitures rate is increased during the second year of a four-year service period. Therefore,
Compensation expense for year two causes total recognized compensation expense through year two to be half of total compensation expense using the new estimate.
The new estimate is used to compute compensation expense on prior years and the year of change. The resulting total amount of expense through the year of change, less the expense already recognized, is the amount of expense recognized in the year of change.
The new estimate continues to be applied in later years.
Change in Estimate on Performance Based Options
KEY: need to expense New Total Amount for prior and current years less amount previously expensed, not just for remaining years (current year catches up).
Stock Option Expiration
Expiration of stock options does not cause reversal of compensation expense because, at the grant date, the firm did provide value to the employee, given that the option had a fair value at that time.
The expense recognized for stock option plans is not based on the expected value of the employee services; rather, it is based on the value of what was given by the employer to the employee.
Expense for a Stock Award
KEY POINT: FV not updated for changes in price AFTER award date. Just marked at award date and spread over vesting period.
Total compensation expense is computed as the fair value of the stock awarded, and is allocated evenly over the vesting period. The fair value at award date is the fair value used for this computation. The two awards are treated as separate awards, each with four year amortization periods. The total expense for year 2 is the sum of the compensation expense to be recognized for each plan for year 2 and is computed as 10,000($20)/4 + 20,000($25)/4 = $175,000. Total fair value is not updated after the award date.
SARS Expense
If Cash Settled, just Book Expense and Liability (not Equity) based on the FV Increase (say $56 vs $50 strike) NOT the full FV.
Then Expense over vesting period. As Price rises, will need to expense based on new total and current year will need to reflect all previous years as well.
Easier to see years remaining and take the reciprocal. (1 year or 3 year vesting means 1/3 of new total is left to expense and remaining 2/3 is expensed in current year LESS anything already expensed.
AFTER Vesting, if continues to increase, must book the additional expense.
SARS that are for past services and immediately vest.
This is like the post Vesting expense recognition (all in one year) when price keeps going up.
The rights are immediately vested, because they can be exercised immediately. Therefore, the entire $300,000 amount is recognized as expense in 2005. Changes in market price in future years, before the rights are exercised, are recognized on a current and prospective basis (change in estimate).
