Accounting for Stock (or Share) Based Compensation
- A frequent component of corporate executive compensation is stock or share based.
- Stock based compensation can take the form of: stock grants, stock options, stock appreciation rights (SARs), or phantom stock.
- GAAP and IFRS require that share-based compensation is expensed on the basis of fair value.
- Stock Grants: the employing company gives shares to employees.
Stock Grant Expense = the fair value of the stock on the grant date recognized over period in which the company benefitted from the employee’s service.
Stock Options: this form of compensation gives the employee the right to by a specific numbers of shares, at a specific exercise price, within an established period of time.
GAAP and IFRS require companies to use the fair value method to account for stock options.
The compensation cost is measured on the on the date the options are awarded, based on market prices or by using an options valuation model such as Black-Scholes or the binomial model.
The compensation cost is allocated to the service period and this is typically the timeframe between the grant date and the date when the employee can exercise the options (the vesting date).
Management Assumptions and Stock Option Compensation Accounting
When a company compensates with stock options, certain valuation assumptions must be employed in order to account for the compensation expense.
Assumptions that must be made include: stock price volatility, the expected risk free interest rate, and future dividend payments.
Even small changes to the values of these assumptions can have significant impact on the value of the options (and consider that a company may issue hundreds of thousands to executives).
Both stock option and defined benefit retiree compensation plans bring subjective elements into the financial reporting process. A well-trained financial analyst will understand how to spot, interpret, and adjust for management accounting choices in order to derive the true economic picture.
- CFA Level 2: Financial Reporting Part 2 – Introduction
- Intercorporate Investments Accounting - Ownership Categories
- Minority Passive Investments – Accounting Classes
- Minority Active Investments and the Equity Method for Financial Reporting
- Joint Venture Investments
- Controlling Interest Investments: Accounting for Business Combinations
- Purchase Method of Accounting for Controlling Interest Investments or Acquisitions
- Pooling of Interests Method to Account for Controlling Interest Investments
- Purchase Method vs. Pooling of Interest Method
- Acquisition Method to Account for Controlling Interest Investments
- GAAP Purchase Method, IFRS Purchase Method, and GAAP Acquisition Method Accounting
- Variable Interest Entities (VIEs) and Special Purpose Entities (SPEs)
- Defined Benefits Plans vs. Defined Contribution Plans
- Measuring the Defined Benefit Obligation
- Pension Expense (both GAAP & IFRS) for the Income Statement
- Defined Benefit Plans & the Company Balance Sheet
- The Role of Actuarial Assumptions in DB Plan Accounting
- Economic Pension Expense
- Pensions and the Statement of Cash Flows
- Accounting for Stock (or Share) Based Compensation
- Financial Statement Consolidation of Multinational Operations
- Consolidation: Presentation Currency vs. Functional Currency vs. Local Currency
- Foreign Currency Translation
- Temporal Method for Translation of Foreign Statements
- Current Rate Method for Translation of Foreign Statements
- Consolidating Financial Statements: Determining the Functional Currency
- Translation Methods and Financial Statement Effects
- Accounting for Subsidiaries in Hyperinflationary Economies
- CFA Level 2: Financial Reporting 2 - Recommendations
- MBS Weighted Average Life