Stock Compensation Flashcards
What is Non-compensatory plan and what the criteria has to meet to be a non-compensatory plan?
- Essentially all employees can participate
- Employee must decide within one month of the firm setting the price for the stock whether to enroll the plan
- Discount
What is Compensatory plan and its JE?
When the pervious page five criteria not all met, then it’s compensatory plan at exercise
JE:
Dr. Compensation expense (discount from MP on date of purchase)
dr. Cash. Discounted price
Cr. CS par of stock issued
Cr. PIC CS remainder
What is stock option plan is purchased
When the option is exercised
Provide employee with option to purchase shares of employer firm at a fixed price in the future, after the vesting period. The plan will expire in certain point in future
Firm matching stock option JE
If the stock option was used for compensatory plan, JE
Dr. Compensation expense (firm paid portion)
Dr. Cash. (Amy paid by employee)
Cr. C/S. At par value of stock issued
Cr. PIC-CS. Price - par
Compensatory plan:
Dr. Compensatory expense. discount from MP on date of purchase
Dr. Cash. (Discounted price)
Cr. CS at par
Cr. PIC-CS remainder
How is FASB measuring compensation expense?
Choose the ,ore reliable one of
1) value of employee service to be received
2) value of the option provided
To be reliable, GAAP requires the FV of option grant be estimated by option -pricing model (ie. Current stock price, dividend yield, exercise price…)
How is option cost allocated for years vested?
Compensation expense Record as:
(Shares * FV of the option price) / years of vesting
Record as: dr. Compensation expense. Cr. PIC - stock option
If the option was vested immediately, expense the whole amount at FV
IF THE FIRM issue stock dividend or stock split, the unexercised amount will be adjusted
Where to report compensation expense?
At exercise date?
When expired?
Income stmt for non-mftg firms
For mftg firms, may allocate a portion to inventory and then to COGS
At exercise, record expense as:
Dr. Cash
Dr. PIC-stock option
Cr. CS
Cr. PIC CS
(when price of stock is decreasing, no retrospective adjustment)
Dr. PIC-stock option
cr. PIC. - expired stock options
Even if expired, still record the expense
Net effect of JE is to reduce RE by stock option amount
How to record the first year compensation expense from stock option vested in 3 years?
Total Compensation expense /3 = year 1
How to recognize total compensation expense using FV method?
Value of the option at grant date and adjust for forfeiture
If the forfeiture rate change, how to adjust the expense recognized from priory years?
The new estimate is used to compute Compensation expense of prior year of change to get total amount of expense through year of change - expense already recognized in year one = expense to be recognize in year of change
I.e: grant 900 shares at $2 FV vesting in 4 year, yr 1 there is no forfeiture, year two has 5% forfeiture, what is the compensation expense for year two alone?
Year 1: 9002 = 1800 / 4= 450
Year 2: 900.95*2 = 1710 *(2/4) = 855 -450= $ 405
Stock award (restricted stocks)
What is it and what are the JE look like?
Employee who gets stock award can’t sell it until the award is vested
Record at shares time the FV at grant date
Using “gross method”
JE: grant date
dr. deferred compensation expense 6000
Cr. CS 1000
Cr. PIC-CS 5000
Comp expense during vesting: NO ENTRY, because already recorded at grant date.
When using “net method”: NO ENTRY at grant date
Record comp expense at each 12/31
Dr. Comp expense 2000. Cr. pic-stock award 2000
Each year, comp expense is total expense / yrs of vesting
When it is exercised:
Dr. PIC- stock award
Cr. CS
Cr. PIC -CS
If the one of the two employees left the company, how to unrecognized the comp expense recognize from prior year and how to find out eh current year comp expense?
I.e 500 shares at $1 par awarded to two employees, Mv is $6, vesting period is 3 years
On grant date:
Dr. Deferred comp expense 6000
Cr. CS. 1000
Cr. PIC - CS 5000
Comp expense 6000/3= 2000
Deferred comp expense. 2000
When vesting:
Pic - stock award. 6000
Cr. CS. 1000
Pic. - CS. 5000
When forfeited: one manager left the company
Record using net method:
Dr. CS 500
Dr. PIC-CS 2500
Cr. deferred comp expense 2000
Cr. comp expense 1000
Comp expense 1000
Deferred comp expense 1000
Takes back the comp expense recognize from prior year
If some stock award was issued for year 1 and then Additional is issued in year 2, how to account for the two year comp expense?
Treat both issuance separately, and add both expense together, if no forfeiture, no fancy calculation
Stock appreciation rights
What is it?
Different from stock option plan, the SARS is 1) employees receive the stock price at grant date - stock price at exercise date
2) pays nothing
3) the employee specifies SAR benefit payment either in cash or stock.
If the SAR allow employer to issue stock, then count as stock option, the FV is at grant date, and the service expense is allocate over service period.
If SAR payment is cash, the firm record a liability when compensation expense is recognized. Compensation expense is based on the FV at end of the period.
Difference of stock award and SAR option expiration
Neither will expire, only have forfeiture, when forfeit:
Stock award will reverse prior expense
SARS will reevaluate the expense Similar to stock option
