Stock Based Compensation

Question 1

FASB 718-10-25-2

Answer 1

• Applies to transactions in which entity grants shares of its common stock, stock options, or other equity instruments to its employees
  
  • Common Stock granted to employees, Stock options awarded to employees, transfer of equity instruments to employees
  • Except for equity instruments held by an employee stock ownership plan
    Should recognize using the fair value method

Question 2

Compensatory Stock Option Plans - Recognition date

Answer 2

• Total comp cost is determined at the date of the grant, based on the fair value of the award at that date
  
  • Total comp cost is recognized over the service period by recording the following type of entry
    ○ D Compensation Expense
    § C APIC - Stock Options
  • Stock Options are
    exercised - APIC and Stock Options account reduced
    ○ D Cash (For amounts employees pay)
    ○ D APIC - Stock Options
    § C Common Stock (Par of stated value of shares)
    C Capital in Excess of Par - Common
  • Effects of changes in liability during the service period are recognized as a compensation cost over the service period
    Earnings should occur equally over the vesting period, compensation expense should be incurred evenly
    ○ Ex, if Market value is at $8 two years after the start date, and exercise date isn’t until year 3:
    2/3 * (8 * number of shares ) = Total liability

Question 3

Fair Value Method for Stock Options

Answer 3

Equity instruments for goods and services must all use the fair value method