PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACnthia J. !oone, Ph.D., CPACopyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.Share-Based Compensationand Earnings Per ShareChapter 1919-2Share-Based CompensationCom"ensation: Salar Sto#k awardsSto#k Award Plans!estri#ted sto#k "lans $suall tied to #ontinuin% em"loment. Com"ensation is market "ri#e at date o& %rant. Com"ensation e'"ense a##rued o(er ser(i#e "eriod. 19-3Stock Option PlansSto#k o"tion "lans %i(e em"loees the o"tion to bu a s"e#i&ied number o& shares o& the &irm)s sto#k,at a s"e#i&ied e'er#ise "ri#e,durin% a s"e#i&ied "eriod o& time.*he &air (alue is a##rued as #om"ensation e'"ense o(er the ser(i#e "eriod &or whi#h "arti#i"ants re#ei(e the o"tions, usuall &rom the date o& %rant to when the o"tions be#ome e'er#isable +the (estin% date,. 19-4Expense The Great DebateHistorically, options have been measured at their intrinsic value the simple diference between the market price of the shares and the option price at which they can be acquired. If the market and exercise price are equal on the date of grant, no compensation expense is recognied even if the options provide executives with substantial income.Historically, options have been measured at their intrinsic value the simple diference between the market price of the shares and the option price at which they can be acquired. If the market and exercise price are equal on the date of grant, no compensation expense is recognied even if the options provide executives with substantial income.19-5Failed Attempt to Require Expensing-""osition to a "ro"osed .ASB Statement to -""osition to a "ro"osed .ASB Statement to re#o%ni/e e'"ense &or #ertain sto#k o"tion "lans re#o%ni/e e'"ense &or #ertain sto#k o"tion "lans ha(e identi&ied three ob0e#tions.ha(e identi&ied three ob0e#tions.1.1.-"tions with no intrinsi# (alue at issue -"tions with no intrinsi# (alue at issue ha(e /ero &air (alue and should ha(e /ero &air (alue and should notnot %i(e %i(e rise to e'"ense re#o%nition.rise to e'"ense re#o%nition.2.2.It is im"ossible to measure the &air (alue o& It is im"ossible to measure the &air (alue o& #om"ensation on the date o& %rant.#om"ensation on the date o& %rant.3.3.*he "ro"osed standard would ha(e *he "ro"osed standard would ha(e una##e"table e#onomi# #onse4uen#es.una##e"table e#onomi# #onse4uen#es.-""osition to a "ro"osed .ASB Statement to -""osition to a "ro"osed .ASB Statement to re#o%ni/e e'"ense &or #ertain sto#k o"tion "lans re#o%ni/e e'"ense &or #ertain sto#k o"tion "lans ha(e identi&ied three ob0e#tions.ha(e identi&ied three ob0e#tions.1.1.-"tions with no intrinsi# (alue at issue -"tions with no intrinsi# (alue at issue ha(e /ero &air (alue and should ha(e /ero &air (alue and should notnot %i(e %i(e rise to e'"ense re#o%nition.rise to e'"ense re#o%nition.2.2.It is im"ossible to measure the &air (alue o& It is im"ossible to measure the &air (alue o& #om"ensation on the date o& %rant.#om"ensation on the date o& %rant.3.3.*he "ro"osed standard would ha(e *he "ro"osed standard would ha(e una##e"table e#onomi# #onse4uen#es.una##e"table e#onomi# #onse4uen#es.19-6Recognizing Fair Value of OptionsA##ountin% &or sto#k o"tions "arallels the a##ountin%A##ountin% &or sto#k o"tions "arallels the a##ountin%&or restri#ted sto#k we dis#ussed earlier. We are&or restri#ted sto#k we dis#ussed earlier. We arere4uired to estimate the &air (alue o& sto#k o"tionre4uired to estimate the &air (alue o& sto#k o"tionon the %rant date.on the %rant date.A##ountin% &or sto#k o"tions "arallels the a##ountin%A##ountin% &or sto#k o"tions "arallels the a##ountin%&or restri#ted sto#k we dis#ussed earlier. We are&or restri#ted sto#k we dis#ussed earlier. We arere4uired to estimate the &air (alue o& sto#k o"tionre4uired to estimate the &air (alue o& sto#k o"tionon the %rant date.on the %rant date.*he .ASB re4uires that #om"ensation e'"ense be *he .ASB re4uires that #om"ensation e'"ense be measured usin% one o& se(eral o"tion "ri#in% models measured usin% one o& se(eral o"tion "ri#in% models that deal with:that deal with:1. 1. 5'er#ise "ri#e o& the o"tion. 5'er#ise "ri#e o& the o"tion.2. 5'"e#ted term o& the o"tion. 2. 5'"e#ted term o& the o"tion.3. Current market "ri#e o& the sto#k. 3. Current market "ri#e o& the sto#k.6. 5'"e#ted di(idends. 6. 5'"e#ted di(idends.7. 5'"e#ted risk8&ree rate o& return. 7. 5'"e#ted risk8&ree rate o& return.9. 5'"e#ted (olatilit o& the sto#k. 9. 5'"e#ted (olatilit o& the sto#k.19-7Plans with Performance or Market ConditionsIn some #ir#umstan#es, #om"ensation &rom a sto#k o"tion "lan de"ends on meetin% a performance targetperformance target. When this is the #ase, #om"ensation e'"ense de"ends on whether or not we &eel it is probableprobable that the tar%et "er&orman#e will be met.19-8U. S. GAAP vs. IFRSA deferred tax asset (DTA) is created for the cumulatie amou!t of the fair alue of the o"tio!s the com"a!# has recorded for com"e!satio! ex"e!se$Accou!t for each esti!% amou!t se"aratel# or accou!t for the e!tire a&ard o! the strai%ht-li!e 'asis oer the e!tire esti!% "eriod$The deferred tax asset is !ot created u!til the a&ard is (i! the mo!e#)* that is it has i!tri!sic alue$+trai%ht-li!e choice is !ot "ermitted$ ,om"a!ies !ot re-uired to reco%!i.e the a&ard that has ested '# each re"orti!% date$There are more similarities than differences in the treatment of stock options. One major difference is the treatment of deferred tax assets and when options have graded vesting.19-9Plans With Graded-Vesting!ather than sto#k o"tion "lans (estin% on a sin%le date, more "lans awards s"e#i& that re#i"ients %raduall be#ome eli%ible to e'er#ise their o"tions rather than all at on#e. *his is #alled :%raded (estin%.; A##ountin% &or #om"ensation e'"ense ma be handled:11The com"a!# ma# estimateThe com"a!# ma# estimate a si!%le fair alue for eacha si!%le fair alue for each of the o"tio!s/ ee! thou%hof the o"tio!s/ ee! thou%h the# est oer di0ere!t timethe# est oer di0ere!t time "eriods/ usi!% a si!%le"eriods/ usi!% a si!%le &ei%hted-aera%e ex"ected&ei%hted-aera%e ex"ected life of the o"tio!s$ life of the o"tio!s$22The com"a!# ma# use a sli%htl#The com"a!# ma# use a sli%htl# more com"lex method 'ecause itmore com"lex method 'ecause it usuall# results i! lo&er ex"e!se$usuall# results i! lo&er ex"e!se$ 1! this a""roach/ &e ie& each1! this a""roach/ &e ie& each esti!% %rou" se"aratel#/ as if itesti!% %rou" se"aratel#/ as if it &ere a se"arate a&ard$ 2or&ere a se"arate a&ard$ 2or exam"le/ a com"a!# ma# a&ardexam"le/ a com"a!# ma# a&ard stoc3 o"tio!s that est 254 i!stoc3 o"tio!s that est 254 i! the 5rst #ear/ 254 i! the seco!dthe 5rst #ear/ 254 i! the seco!d #ear/ a!d 564 i! the third #ear$#ear/ a!d 564 i! the third #ear$ 2or accou!ti!% "ur"oses &e hae2or accou!ti!% "ur"oses &e hae three se"arate a&ards$three se"arate a&ards$ 19-16Employee Share Purchase Plans7ermit em"lo#ees to 'u# shares directl# from their em"lo#er$8suall# the "la! is co!sidered com"e!sator#/ a!d com"e!satio! ex"e!se is recorded$9m"lo#ees ma# 'u# 166 shares of !o "ar stoc3 for :8$56 "er share$ The curre!t mar3et "rice is :16$66$ The :1$56 discou!t is recorded as com"e!satio! ex"e!se;Cash +1?.7