FAR - Financial Statement Acct - Stock Compensation (Share Based Payments) Flashcards Preview

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Flashcards in FAR - Financial Statement Acct - Stock Compensation (Share Based Payments) Deck (25):

Stock Options

Mgmt allowed to purchase employer's stock at fixed price after providing services


Grant Date

Vesting Date

Service Period

Exercise period

When mgmt is awarded the option (total comp exp determined)

When mgmt can begin to exercise the option

from Grant Date to Vesting Date

after vesting date, period during which the option can be exercised


Compensation Expense

(recognized during service period- updates when forfeiture rate changes & affects expense for the current period )

FV of options expected to be exercised

FV measured @ grant date using pricing model

Amortized SL over service period


Value to mgmt

Value to firm

Stock price may rise above option during exercise period

incentive generated for mgt to work hard


Change in Est. Forfeitures

Update total compensation expense when forfeiture rate changes (change applied to current period for expense)

No retroactive application

Usually reduce compensation expense


Expiration of Options

expire if stock price fails to rise above exercise price

- no retroactive adj. for exp.
- comp exp remains but PIC-stock options is transferred to PIC-expired stock options


Performance (variable) Plans

require performance target to be met before vesting

"variable/performance" b/c 1/+ terms is not set @ grant date

incentives: increase # of shares/reduction in option price

Adj. in expected # of shares = handled same way as forfeiture changes

recompute compensation expense for the current period based on target levels achieved



does not call for reversal of expense (for performance, opposite is true)

if no options vest b/c min. incentive level isn't met, reverse previously recognized expense.

Firm ultimately gave nothing to manager


When stock options aren't vested b/c performance target is not expected to be met...affect on compensation expense?

compensation expense/owner's equity reversed


Stock award

stock awarded for continuing employment, employee cannot sell stock until award is vested


Stock award - compensation expense

fair value of stock grant date, number of shares awarded X market price of stock

Expense & PIC is recognized over the service period


Stock awards - service period

vesting/service period can be 1/more years


Stock award - forfeiture

if employee doesn't continue employment through vesting date, expense recognized on awards is reversed, effect is to reduce compensation expense in current yr by amount of expense recognized in prior yrs.

Reversal recorded b/c stock is taken back = treated as an estimate change, retroactive application isn't necessary.


Stock awards - net effect on account

expense = stock value @ grant date is recognized

contributed capital increases

retained earnings decreases

No net effect on OE


Deferred Compensation Expense

Contra OE


Net method, what acct is credited to recognize comp. exp?

Gross method, what acct is credited to recognize comp. exp?


Deferred Comp. Exp.


2 methods of recording compensation expense for stock awards

1) net method
2) gross method


stock award - multiple awards, treat compensation expense?

treat as separate awards and combine the amortization to get the period's compensation expense


Stock Appreciation Rights (SAR)

employee receives stock/cash as part of the difference between stock price @ grant date and stock price @ exercise date, while employee pays nothing


Stock Appreciation Rights - type of awards

1) cash - recorded as liab
2) stock - acct'd for using stock option plan


Liability - classified SARS payable in cash

FV of SAR is re-estimated annually @ exercise date

Estimated forfeitures included in in total compensation expense

Compensation expense recorded each yr (SL basis) using catch-up method for changes in est. forfeitures


SAR payables

number of options multiply difference between stock price at grant date & exercise date


account is credited when periodic compensation expense is recognized for an SAR payable in cash?

SAR Liability


When can compensation expense be negative for a period?

when stock price falls lower than price at grant date causing a reversal in compensation expense


Compensation Expense

Total compensation expense is the product of the number of shares in the award and the market price of stock at the grant date. This amount is recognized over the service period required for the employee to receive or keep the shares.

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