Compensation Stock Based Equity Agreement by lhj75936


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									Stock-based compensation
   Under SFAS No. 123 (Rev. 2004)

     Prepared by Teresa Gordon

   {With IFRS comparison at the end}

Two kinds of option plans

       Rules on Slide 3

     Classified as Liability or Equity
       See chart on Slide 4

Non-Compensatory Plans
1. Option exercise amount very close to
       market price
        Safe harbor rule: discount ≤ 5% of market price
2. Substantially all employees may participate
   on an equitable basis
3. Short enrollment period
  a.     No more than 31 days after price is fixed to
  b.     Purchase price is based solely on market price at
         purchase date
           Also, employees can cancel participation before
              purchase date and get a refund

  Compensatory Awards
  Classified as liability          Classified as equity
  Remeasured at fair value on      Measured at fair value at
  each balance sheet date          the grant date and not
  until the award is settled       subsequently remeasured
  Award is classified as           Award is classified as equity
  liability if the entity can be   if it is an equity instrument
  required under any               and the company cannot be
  circumstances* to settle         required to settle the option
  the option or similar            in cash under any
  instrument by transferring       circumstances.
  cash or other assets
Modified by FSP FAS 123(R)-4 (Feb 3, 2006)                    5
FASB 123 – Fair Value Method
  FASB requires the fair value method
  The compensation cost (to be amortized to
  expense) is determined by an option pricing
     Factors in models include:
        Market price and exercise price
        Risk free interest rate
        Expected volatility of stock prices
        Expected dividend on stock
        Number of years until options expire

Conditions in Awards
  Conditions may impact vesting,
  exercisability, exercise price, and other
  features that affect the fair value of an
     Service conditions
     Performance conditions
     Market conditions

Recognition of expense
    When services are provided
        Generally grant date until the options can
         be exercised (the exercise date)
        Also called “the service period”

Grant date
                                      Exercise Period

               Service Period
   Awards classified as equity
      Compensation is measured at each the
      measurement date and allocated to
      service period

Measurement Date
   Grant date
                                    Exercise Period

                   Service Period
Awards classified as liabilities
    Compensation is estimated at each
    balance sheet date through settlement

                              Measurement Date

Grant date
                               Exercise Period

             Service Period
    Requisite service period     Performance conditions
    Estimating turnover          Market conditions
    Deferred taxes               Using an option pricing
    Modification of terms        model
                                 Nonpublic companies

             Measurement Date?
Grant date
                                        Exercise Period

               Service Period
1. Award classified as equity
2. Award classified as debt (nonpublic)
3. Award classified as debt (public

 Example 1

Award Classified as Equity
                                          Go to Excel
     Information for example:
         1,000 options for common stock
         $3 par
         market price $8 and option price $8
         Service condition=work for company for 4
          years        Fair value per share - $6
Grant date
                                    Exercise Period

               Service Period
When people quit . . .
     We “undo” the recognition of
      compensation expense related to options
      that FAIL TO VEST because of service or
      performance conditions
     Credit compensation expense, and debit
      APIC – stock options outstanding

 Failure to perform service
 Paid in Capital, stock options   2,000
       Compensation Expense               2,000
When vested options are not
  Perhaps market price < option price
        “Out of the money”
     No one will exercise the options
     When they expire, the balance is
      transferred to APIC – expired options
     Compensation is NOT reversed

 Expiration of unexercised VESTED stock options:
 Paid in Capital, stock options          2,000
      Paid in Capital, expired options           2,000
Example 2 – SARs (Go to Excel)
  Mary works for a nonpublic company. Mary will
  receive the difference between the current
  stock prices ($10) and the stock price that
  exists when she exercises her 1,000 SARs. She
  cannot exercise the options for 2 years. The
  options expire 5 years from the grant date

Grant date                            Expiration Date

       Service Period    Exercise Period                18
Example 3
  Same facts as Example 2 but the
  company is publicly traded
  Therefore, they must use the fair value
  method and estimate fair value on each
  balance sheet date.
  So this makes the SARS quite a bit
  more complicated!

Share-based Compensation
         IFRS 2 vs FAS 123R

Comparing the standards
         IFRS                        US GAAP
 Grant date is when          Grant date is the earlier of
 agreement is reached           mutual understanding, or
                                date when employee begins
                                 to provide services

 All employee awards are     Compensatory and
 treated as compensatory     noncompensatory have
                             separate rules
 Payroll taxes are accrued   Payroll taxes are recorded
 as employees earn the       at exercise date (or
 compensation                vesting date for restricted
Comparing the standards
           IFRS                             US GAAP
 Deferred tax assets                 Deferred taxes
 recognized when share               recognized based on
 options have current                grant date fair value as
 intrinsic value                     compensation is
    Adjustments made based          recognized
     on current stock prices            Deferred tax asset is not
    This increases the volatility       revalued as stock prices
     of the impact on profit and         change
Equity Awards vs. Liability Awards
         IFRS                              US GAAP
 IFRS classification is            If the award CAN BE
 based on the method of            settled in cash, it is
 expected settlement               classified as a liability
 (cash or shares)                  award
     IF recipient has a choice,      If recipient has CHOICE, it
      classification is based on       is assumed to be cash and
      the expected settlement          therefore a liability award
     Fixed monetary amount to        Fixed monetary amount to
      be paid in varying number        be paid in varying number
      of shares = equity award         of shares = liability award
Recognition of Awards
          IFRS                          US GAAP
 Recognized over the             Recognized over the
 related period of               related period of
 employee service                employee service
    Explicit                       Explicit
    Implicit                       Implicit
    No “derived” – so in rare      Derived
     cases, the recognition
     period will be different
Recognition for Plans with Graded Vesting
         IFRS                    US GAAP
 Must treat each tranche   May treat each tranche as
 as a separate award       a separate award
                              Recognize compensation
                               separately over the period
                               of each separate tranche
                           May use straight-line
                           method for the entire
                              Recognize compensation
                               over the period covered by
                               all the tranches

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