McLaughlin, Budd, Night Editor has reference to this Academic Journal, PHwiki organized this Journal Share-Based Compensation in addition to Earnings Per Share 19 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Share-Based Compensation Compensation: Salary Stock awards Stock Award Plans Restricted stock plans Usually tied to continuing employment, Compensation is market price at date of grant, Compensation expense accrued over service period. Stock Option Plans Stock option plans give employees the option to buy a specified number of shares of the firm’s stock, at a specified exercise price, during a specified period of time. The fair value is accrued as compensation expense over the service period as long as which participants receive the options, usually from the date of grant to when the options become exercisable (the vesting date).
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Expense The Great Debate Historically, options have been measured at their intrinsic value the simple difference between the market price of the shares in addition to the option price at which they can be acquired. If the market in addition to exercise price are equal on the date of grant, no compensation expense is recognized even if the options provide executives with substantial income. Failed Attempt to Require Expensing Opposition to a proposed FASB Statement to recognize expense as long as certain stock option plans have identified three objections. Options with no intrinsic value at issue have zero fair value in addition to should not give rise to expense recognition. It is impossible to measure the fair value of compensation on the date of grant. Current practices have unacceptable economic consequences. Recognizing Fair Value of Options Accounting as long as stock options parallels the accounting as long as restricted stock we discussed earlier. We now are required to estimate the fair value of stock option on the grant date. The FASB now requires that compensation expense be measured using one of several option pricing models that deal with: 1. Exercise price of the option. 2. Expected term of the option. 3. Current market price of the stock. 4. Expected dividends. 5. Expected risk-free rate of return. 6. Expected volatility of the stock.
Plans with Per as long as mance or Market Conditions In some circumstances, compensation from a stock option plan depends on meeting a per as long as mance target. When this is the case, compensation expense depends on whether or not we feel it is probable that the target per as long as mance will be met. U. S. GAAP vs. IFRS A deferred tax asset (DTA) is created as long as the cumulative amount of the fair value of the options the company has recorded as long as compensation expense. Account as long as each vesting amount separately or account as long as the entire award on the straight-line basis over the entire vesting period. There are more similarities than differences in the treatment of stock options. One major difference is the treatment of deferred tax assets in addition to when options have graded-vesting. The deferred tax asset is not created until the award is in the money; that is it has intrinsic value. Straight-line choice is not permitted. Companies not required to recognize the award that has vested by each reporting date. Plans With Graded-Vesting Rather than stock option plans vesting on a single date, more plans awards specify that recipients gradually become eligible to exercise their options rather than all at once. This is called graded vesting. Accounting as long as compensation expense may be h in addition to led: 1 The company may estimate a single fair value as long as each of the options, even though they vest over different time periods, using a single weighted-average expected life of the options. 2 The company may use a slightly more complex method because it usually results in lower expense. In this approach, we view each vesting group separately, as if it were a separate award. For example, a company may award stock options that vest 25% in the first year, 25% in second year, in addition to 50% the third years. For accounting purposes we have three separate awards.
Employee Share Purchase Plans Permit employees to buy shares directly from their employer. Usually the plan is considered compensatory, in addition to compensation expense is recorded. Employees may buy 100 shares of no par stock as long as $8.50 per share. The current market price is $10.00. The $1.50 discount is recorded as compensation expense: Cash (100 × $8.50) 850 Compensation expense (100 × $1.50) 150 Common stock (100 × $10.00) 1,000 Market value Earnings Per Share (EPS) Of the myriad facts in addition to figures generated by accountants, the single accounting number that is reported most frequently in the media in addition to receives by far the most attention by investors in addition to creditors is earnings per share. Simple Capital Structure (Basic EPS) Basic Earnings Per Share Net income (after tax) Preferred dividends Weighted average outst in addition to ing common stock Current periods cumulative preferred stock dividends (whether or not declared) in addition to noncumulative preferred stock dividends (only if declared).
Issuance of New Shares Compute the weighted average number of shares of common stock outst in addition to ing. Issuance of New Shares Compute the weighted average number of shares of common stock outst in addition to ing. 100,000 + [50,000 × (9/12)] + [10,000 × (3/12)] = 140,000 Shares at Jan. 1 New Shares New Shares Annual Weighting Annual Weighting Stock Dividends in addition to Stock Splits Common shares issued as part of stock dividends in addition to stock splits are treated retroactively as subdivisions of the shares already outst in addition to ing at the date of the split or dividend.
Stock Dividends in addition to Stock Splits Compute the weighted average number of shares of common stock outst in addition to ing. Stock Dividends in addition to Stock Splits Compute the weighted-average number of shares of common stock outst in addition to ing. 100,000 × (2.00) + [50,000 × (9/12) × 2.00] = 275,000 Shares at Jan. 1 New Shares Stock dividend adjustment Annual Weighting Stock Dividends in addition to Stock Splits Retroactive treatment: Stock dividend or split is treated as outst in addition to ing from the beginning of the period. Stock dividend or split is applied retroactively in proportion to the number of shares outst in addition to ing at the time of the dividend or split. New shares issued this period Yes No
Reacquired Shares If shares were reacquired during the period, the weighted-average number of shares is reduced. The number of reacquired shares is time-weighted as long as the fraction of the year they were not outst in addition to ing. Reacquired Shares Compute the weighted-average number of shares of common stock outst in addition to ing. Reacquired Shares Compute the weighted-average number of shares of common stock outst in addition to ing. 100,000 + [50,000 × (9/12)] – [12,000 × (8/12)] = 129,500 Shares at Jan. 1 New Shares Treasury Shares Annual Weighting Annual Weighting
Earnings Available to Common Shareholders Complex Capital Structure (dual EPS) Dilution/Antidilution Test Stock Options Convertible securities Treasury stock method If-converted method Contingently issuable shares Potential Common Shares: Stock options, rights, in addition to warrants Convertible bonds in addition to stock Contingent common stock issues Diluted Earnings Per Share May Report Basic in addition to Diluted Earnings Per Share Options, Rights, in addition to Warrants Proceeds Used to Purchase treasury shares At average market price The treasury stock method assumes that proceeds from the exercise of options are used to purchase treasury shares. This method usually results in a net increase in shares included in the denominator of the calculation of diluted earnings per share.
Options, Rights, in addition to Warrants Determine new shares from assumed exercise of stock options. Compute number of shares repurchased. Options, Rights, in addition to Warrants Determine new shares from assumed exercise of stock options. Compute shares purchased as long as the treasury. Compute the incremental shares assumed outst in addition to ing. New shares from assumed exercise (1) Less: Treasury shares assumed purchased (2) Net increase in shares outst in addition to ing (3) Options, Rights, in addition to Warrants When the exercise price exceeds the market price, the securities are antidilutive in addition to are excluded from the calculation of diluted EPS.
Convertible Securities The if-converted method is used as long as Convertible debt in addition to equity securities. The method assumes conversion occurs as of the beginning of the period or date of issuance, if later. Convertible Securities The assumed conversion of convertible bonds or preferred stock has two effects on dilutive earnings per share: increases the denominator by the number of common shares issuable upon conversion, increases the numerator by decreasing after-tax interest expense on convertible bonds, in addition to dividends on convertible preferred stock. Convertible Securities Dilutive earnings per share may decrease or increase after the assumed conversion. If dilutive earnings per share decreases, the securities are dilutive in addition to are assumed converted. If dilutive earnings per share increases, the securities are antidilutive in addition to are not considered converted.
Appendix 19B – Stock Appreciation Rights The SARs are considered to be equity if the employer can elect to settle in shares of stock. The amount of compensation is estimated at the grant date as the fair value of the SARs. This amount is expensed over the service period. Usually the same as the fair value of a stock option with similar terms. Stock Appreciation Rights The SARs are considered to be a liability if the employee can elect to receive cash upon settlement. In that case, the amount of compensation ( in addition to related liability) is estimated each period in addition to continuously adjusted to reflect changes in the fair value of the SARs until the compensation is finally paid. The current expense ( in addition to adjustment to the liability) is the fraction of the total compensation earned to date by recipients of the SARs (based on the elapsed percentage of the service period), reduced by any amounts expensed in prior periods. End of Chapter 19
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