|
Accounting for
Stock Issued
to Employees
APB
OPINION NO.
25
(superceded by
FAS No. 123R)
|
| Two questions to be
answered: |
| 1. |
When should
the compensation
expense be measured? |
| 2. |
How should the compensation
expense be measured? |
| Compensation expense
should
be determined as of the measurement date--the
first date on which both |
| 1. |
the number
of
shares that an individual employee is entitled to receive and |
| 2. |
the option or purchase
price |
| for many plans,
measurement
date is the grant date--
may be later in plans with variable terms; may be the date of exercise. |
| Compensation expense
is measured
as the excess of the market price over the option price on the
measurement
date. |
| In variable
plans, compensation expense may have to be estimated on the
basis of assumptions as to what will be the final number of shares and
the option price. |
| The above discussion,
following
APB Opinion 25, reflects the intrinsic value
method. Total compensation cost is computed as the excess of the
market price of the stock over the option price on the date when both
the
number of shares to which employees are entitled and the option price
is
known |
FASB No.
123
(superceded
by FAS No. 123R)
FASB No. 123, "Accounting for Stock
Based Compensation,"
encourages but does not require recognition of compensation cost for
the
fair value of stock-based compensation paid to employees.
-
Statement 123 was issued in
1995.
-
The Board concluded that the fair
value method
of recognizing stock-based compensation expense was the preferable
method
of accounting.
-
But, in an effort to end an
extremely divisive
debate between the Board and its constituents, the Board decided to
permit
the continued use of the intrinsic value method of accounting under APB
Opinion No. 25, Accounting for Stock Issued to Employees.
-
However, the Board decided to
require companies
to disclose the pro forma effect of applying the fair value
method
of accounting for stock-based employee compensation.
-
Following the issuance of
Statement 123, most
companies continued to account for stock-based employee compensation
using
the intrinsic value method of accounting under Opinion 25.
Sample exercise
in applying
FAS No. 123
On January 1, 2003, George
Adams Corporation
provides a variety of stock-based compensation plans to its employees.
Under its incentive stock option plan, the company granted options on
January
1, 2003, that permit executives to aqcuire 4 million of the company's
$1
par comon shares within the next 5 years ,but not before December 31,
2004
(the vesting date.) The exercise price is the market price of the
shares on the date of the grant, $14 per share. The fair value of
the 4 million options, estimated by an appropriate option pricing
model,
is $3 per option. No forfeitures are anticpated. Ignore
taxes.
-
Determine the total
compensation cost pertaining
to the options assuming the company chooses to follow the elective fair
value approach for fixed compensation plans.
-
Prepare the appropriate
journal entry to record
the award of the options on January 1, 2003.
-
Prepare the appropriate
journal entry to record
compensation expense on December 31, 2003.
-
Prepare the appropriate
journal entry to record
compensation expense on December 31, 2004.
-
Determine the total
compensation cost pertaining
to the options, assuming the company does not choose to follow the
elective
fair value approach for fixed compensation plans.
sst3
|
| " If options are
not a form of compensation,
what are they? If compensaton isn't an expense, what is it? And,
if expenses shouldn't go in the calculation of earnings, where should
they
go?"
--Warren Buffet, 2002
|
|