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					Chapter 19 - Share-Based Compensation and Earnings Per Share



                                            CHAPTER 19
             SHARE-BASED COMPENSATION AND EARNINGS PER SHARE
Overview
We’ve discussed a variety of employee compensation plans in prior chapters, including pension
and other postretirement benefits in Chapter 17. In this chapter we look at some common forms
of compensation in which the amount of the compensation employees receive is tied to the
market price of company stock. We will see that these “share-based” compensation plans – stock
awards, stock options, and stock appreciation rights - create shareholders’ equity, the topic of the
previous chapter and also often affect the way we calculate earnings per share, the topic of the
second part of the current chapter. Specifically, we view these as ”potential common shares”
along with convertible securities and calculate earnings per share as if they already had been
exercised or converted into additional common shares.

Learning Objectives
   1. Explain and implement the accounting for stock award plans.
   2. Explain and implement the accounting for stock options.
   3. Explain and implement the accounting for employee share purchase plans.
   4. Distinguish between a simple and a complex capital structure.
   5. Describe what is meant by the weighted average number of common shares.
   6. Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and
      the reacquisition of shares.
   7. Describe how preferred dividends affect the determination of EPS.
   8. Describe how options, rights, and warrants are incorporated in the calculation of EPS.
   9. Describe how convertible securities are incorporated in the calculation of EPS.
  10. Determine whether potential common shares are antidilutive.
  11. Determine the three components of the proceeds used in the treasury stock method.
  12. Explain the way contingently issuable shares are incorporated in the calculation of EPS.
  13. Describe the way EPS information should be reported in an income statement.
  14. Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting
      for share-based compensation and EPS.

                                          Lecture Outline
Part A: Share-Based Compensation
        A.   Typically, an executive compensation plan is tied to performance in a way that uses
             compensation to motivate its recipients.
        B.   Many plans include share-based awards.
        C.   Whichever form such a plan assumes, the accounting objective is to record the fair value
             of compensation expense over the periods in which related services are performed.
        D.   This requires:
             1.    Determining the fair value of the compensation.
             2.    Expensing that compensation over the periods in which participants perform
                   services.




                                                      19-1
Chapter 19 - Share-Based Compensation and Earnings Per Share


I.    Stock Award Plans (T19-1)
      A. The compensation is a grant of shares of stock.
      B. The shares usually are restricted so that benefits are tied to continued employment.
           1.   Usually shares are subject to forfeiture if employment is terminated within some
                specified number of years from the date of grant.
           2.   The employee cannot sell the shares during the restriction period.
      C. The compensation is simply the market price of the stock at the grant date.
           1.   Compensation is accrued as expense over the service period for which participants
                receive the shares.
           2.   The service period usually is the period from the date of grant to when restrictions
                are lifted (the vesting date). (T19-2)
      D. If restricted stock is forfeited, related entries previously made would simply be reversed.
II.   Stock Option Plans (T19-3)
      A. Allow recipients the option to purchase (a) a specified number of shares of the firm's
           stock, (b) at a specified price, (c) during a specified period of time.
      B. For tax purposes, plans can either qualify as an ―incentive stock option plan‖ under the
           Tax Code or be "unqualified plans." Under a qualified incentive plan, the recipient pays
           no income tax until any shares acquired are subsequently sold. On the other hand, the
           company gets no tax deduction at all. With a nonqualified plan the employee can’t delay
           paying income tax, but the employer is permitted to deduct the difference between the
           exercise price and the market price at the exercise date. (T19-4)
      C. The accounting objective is to report the fair value of compensation expense during the
           period of service for which the compensation is given. (T19-5)
      D. Compensation is measured at the grant date, estimated using an option-pricing model that
           considers the exercise price and expected term of the option, the current market price of
           the underlying stock and its expected volatility, expected dividends, and the expected
           risk-free rate of return.
      E. When forfeiture estimates change, the cumulative effect on compensation is reflected in
           current earnings. (T19-6)
      F. When options are exercised, cash is debited for the amount received, and stock accounts
           replace paid-in capital – stock options. (T19-7)
      G. If compensation from a stock option depends on meeting a performance target, then
           whether we record compensation depends on whether or not we feel it’s probable the
           target will be met. (T19-8)
      H. If the target is based on changes in the market rather than on performance, we record
           compensation as if there were no target.
      I.   Under U.S. GAAP, a deferred tax asset is created for the cumulative amount of the fair
           value of the options expensed. Under IFRS, the deferred tax asset isn’t created until the
           award is ―in the money;‖ that is, has intrinsic value. (T19-9)
      J.   If recipients gradually become eligible to exercise their options rather than all at once, the
           plan is said to have ―graded vesting.‖ In such a case, most companies view each vesting
           group (or tranche) separately, as if it were a separate award. Companies also are allowed
           to account for the entire award on straight-line basis over the entire vesting period. Either
           way, the company must recognize at least the amount of the award that has vested by that
           date.



                                                      19-2
Chapter 19 - Share-Based Compensation and Earnings Per Share


      K.    Under IFRS, the straight-line choice is not permitted. Also, there’s no requirement that
            the company must recognize at least the amount of the award that has vested by each
            reporting date.

III. Employee Share Purchase Plans (T19-10)
     A. Employee share purchase plans allow employees to buy company stock under convenient
        or favorable terms.
     B. Most such plans are considered compensatory and require the fair value of any discount
        to be recorded as compensation expense.

Part B: Earnings Per Share
I.    For analysts and the financial press, earnings per share is the most frequently cited and reported
      measure of a company’s performance.
      A. EPS is reported in the income statement of all publicly traded firms.
      B. In general, EPS is simply earnings available to common shareholders divided by the
           weighted average number of common shares outstanding.

II.   If a company has no ―potential common shares‖ we consider it to have a simple capital
      structure.
      A. For a simple capital structure, a single presentation of basic EPS is sufficient.
      B. If there are no securities other than common stock and the number of common shares
            remained unchanged, basic EPS is simply net income divided by common shares. (T19-
            11)

III. When the number of shares changes, EPS calculations are based on the weighted average
     number of shares outstanding during the period.
     A. New shares issued during a reporting period are time-weighted by the fraction of the
         period they were outstanding and then added to the number of shares outstanding for the
         period. For instance, if 12,000 new shares are sold on October 1, the denominator of the
         EPS fraction would be increased by: 12,000 x 3/12, or 3,000 shares. (T19-12)
     B. On the contrary, an increase in shares due to a stock dividend or stock split is not time-
         weighted. (T19-13)
         1.    For a stock dividend or stock split, the shares outstanding prior to the stock
               distribution are restated to reflect the increase in shares. That is, we simply increase
               the outstanding shares by the number of new shares.
         2.    The firm would simply have a larger number of less valuable shares (the same pie is
               cut into more slices).
         3.    For example, EPS after a 2 for 1 stock split would be half of what it was before,
               other things being equal.
         4.    When reported again in the comparative financial statements, previous years’ EPS
               are restated for comparability.
     C. If common shares are reacquired (as treasury stock or to be retired) those shares are time-
         weighted for the fraction of the period they were not outstanding. The time-weighted
         shares then are subtracted from the number of shares in the denominator of the EPS
         fraction. (T19-14)



                                                      19-3
Chapter 19 - Share-Based Compensation and Earnings Per Share




IV. Any dividends on preferred stock outstanding are subtracted from reported net income. (T19-
    15)
    A. This is because the denominator in the EPS calculation is the weighted average number of
        common shares, so the numerator should reflect earnings available to common
        shareholders.
    B. This adjustment is made for cumulative preferred stock whether or not dividends are
        declared that period. The assumption is that eventually the dividends will be paid if the
        preferred stock is cumulative.

V.    When a company has securities that could potentially dilute (i.e., reduce) earnings per share, it
      is classified as a complex capital structure. (T19-16)
      A. These potential common shares include stock options and convertible securities.
      B. The company reports both basic and diluted earnings per share.
      C. For diluted EPS, the impact of each potentially dilutive security is reflected by calculating
            earnings per share as if the security already had been exercised or converted into
            additional common shares.
      D. Stock options (also stock rights and stock warrants) give their holders the right to exercise
            their option to purchase common stock, typically at a specified exercise price. The
            increase in shares would reduce EPS. (T19-17)
            1.     When calculating diluted EPS, we pretend the stock options had been exercised at
                   the beginning of the period (or at the time the options are issued, if later).
            2.     We also assume the cash proceeds from the assumed sale were used to buy back (as
                   treasury stock) as many of those shares as could be acquired at the average market
                   price of the shares during the period.
            3.     If the options haven’t vested, ―proceeds‖ also include any compensation not yet
                   expensed.
            4.     If the options are not incentive options, ―proceeds‖ also include any ―excess tax
                   benefits.‖ (T19-18)
            5.     Restricted stock is potentially dilutive and also is included in diluted EPS by the
                   treasury stock method. (T19-19)
      E. For convertible securities, we pretend for the purpose of calculating diluted EPS that the
            conversion already has occurred. (T19-20)
            1.     To include convertible bonds in the calculation of diluted EPS, we pretend the
                   conversion occurred at the beginning of the period (or at the time the convertible
                   security is issued, if later). (T19-21)
                   a.    The denominator of the EPS fraction is adjusted for the additional common
                         shares assumed.
                   b.    The numerator is increased by the interest (after-tax) that would have been
                         avoided in the event of conversion.
            2.     To include convertible preferred stock in the calculation of diluted EPS, we pretend
                   the conversion occurred at the beginning of the period (or at the time the convertible
                   security is issued, if later). (T19-22)
                   a.    The denominator of the EPS fraction is adjusted for the additional common
                         shares assumed.
                   b.    The numerator is not reduced by the preferred dividends because they would
                         have been avoided in the event of conversion.


                                                      19-4
Chapter 19 - Share-Based Compensation and Earnings Per Share




VI. If the effect of the assumed conversion or exercise of potential common shares would be to
    increase, rather than decrease, EPS, we consider them ―antidilutive securities.‖ Antidilutive
    securities are ignored when calculating both basic and diluted EPS. (T19-23)

VII. Contingently issuable shares also are potential common shares. (T19-24)
     A. These are considered outstanding in the computation of diluted EPS if the conditions for
          their issuance currently are met.
     B. For instance, if 50,000 shares will be issued next year if the market price of common
          shares next year is at least $35 and the market price currently is $36, the 50,000 additional
          shares would be simply added to the denominator.

VIII. Financial statement disclosures include both basic and diluted EPS for both income from
      continuing operations and net income. (T19-25)
      A.    Per share amounts also are reported for:
            1.     Discontinued operations,
            2.     Extraordinary items, and
            3.     An accounting change.
      B.    Disclosures should include a reconciliation of the numerator and denominator used in
            the computations.
      C.    IAS No. 33 and U.S. GAAP are similar in most respects. The differences that remain
            are the result of differences in the application of the treasury stock method, the
            treatment of contracts that may be settled in shares or cash, and contingently issuable
            shares. (T19-26)

Decision-Makers’ Perspective
     A. Analysts frequently use EPS data in connection with the price-earnings ratio.
          1.    The P/E ratio is the market price per share divided by the earnings per share.
          2.    The P/E ratio measures the decision makers' perception of the ―quality‖ of a
                company’s earnings by indicating the price multiple the market is willing to pay for
                the firm’s earnings.
          3.    In a way, it represents the market’s expectation of future earnings as indicated by
                current earnings taking into account analysts’ perceptions of a business’s growth
                potential, stability, and relative risk.
     B. Another measure, the dividend payout ratio, indicates the percentage of earnings that is
          distributed to shareholders as dividends.

Appendix B.     Stock Appreciation Rights (SARs) (T19-27)
    A. SARs enable an executive to benefit by the amount that the market price of the
         company’s stock rises, but without having to buy shares.
    B. The executive receives the ―share appreciation‖ at exercise that has occurred since the
         date of grant.
    C. Share appreciation is the increase in the market price over a prespecified price (usually
         the market price at the date of grant).
    D. The share appreciation usually is payable in cash but may be payable in shares equal in
         value to the share appreciation.




                                                      19-5
Chapter 19 - Share-Based Compensation and Earnings Per Share


            1.    The award is considered to be equity if the employer can elect to settle in shares of
                  stock rather than cash.
            2.    The award is considered to be a liability if the employee can elect to receive cash
                  (which usually is the case).
            3.    When considered debt, the amount of compensation is continually adjusted to
                  reflect changes in the fair value of the SARs until the SARs expire or are exercised.
                  (T19-28, T19-29)
            4.    When the award is considered equity fair value is measured at the grant date.


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                                                      19-6
Chapter 19 - Share-Based Compensation and Earnings Per Share



                                 STOCK AWARD PLANS

 Usually, restricted shares are subject to forfeiture if the
  employee doesn’t remain with the company.

     The share value is accrued as compensation expense over the
      service period for which participants receive the shares,
      usually from the date of grant to when restrictions are lifted
      (the vesting date).




                                                               T19-1




                                                      19-7
Chapter 19 - Share-Based Compensation and Earnings Per Share



          STOCK AWARD PLANS ILLUSTRATION
Under its restricted stock award plan, Universal Communications
grants 5 million of its $1 par common shares to certain key
executives at January 1, 2011. The shares are subject to forfeiture
if employment is terminated within 4 years. Shares have a current
price of $12 per share.
 January 1, 2011
 No entry
 Calculate total compensation expense:
         $12             fair value per share
       x 5 million       shares awarded
       = $60 million     total compensation
The total compensation is allocated to expense over the 4-year
service (vesting) period: 2011 - 2014
   $60 million ÷ 4 years = $15 million per year
December 31, 2011, 2012, 2013, 2014                             ($ in millions)
Compensation expense ($60 million ÷ 4 years) .............        15
  Paid-in capital – restricted stock ........................           15
December 31, 2014
Paid-in capital– restricted stock (5 million sh. at $12)...       60
  Common stock (5 million shares at $1 par) .................            5
  Paid-in capital – excess of par (to balance) ............             55
 If restricted stock is forfeited because, say, the employee quits
  the company, related entries previously made would simply be
  reversed.
                                                                   Illustration 19-1
                                                                             T19-2




                                                      19-8
Chapter 19 - Share-Based Compensation and Earnings Per Share



                                STOCK OPTION PLANS
     Stock option plans give employees the option to purchase (a)
      a specified number of shares of the firm's stock, (b) at a
      specified price, (c) during a specified period of time.

     The fair value is accrued as compensation expense over the
      service period for which participants receive the options,
      usually from the date of grant to when the options become
      exercisable (the vesting date).

     This requires the use of an option pricing model. The model
      should take into account the:
        exercise price of the option
        expected term of the option
        current market price of the stock
        expected dividends
        expected risk-free rate of return during the term of the
         option
        expected volatility of the stock




                                                               T19-3


                                                      19-9
Chapter 19 - Share-Based Compensation and Earnings Per Share



                                       Tax Implications
         For tax purposes, plans can either qualify as an ―incentive
          stock option plan‖ under the Tax Code or be "unqualified
          plans."

         Among the requirements of a qualified option plan is that
          the exercise price be equal to the market price at the grant
          date. Under a qualified incentive plan, the recipient pays no
          income tax until any shares acquired are subsequently sold.
          On the other hand, the company gets no tax deduction at all.

         With a nonqualified plan the employee can’t delay paying
          income tax, but the employer is permitted to deduct the
          difference between the exercise price and the market price at
          the exercise date.




                                                                  T19-4




                                                     19-10
Chapter 19 - Share-Based Compensation and Earnings Per Share



                          EXPENSING STOCK OPTIONS

   At January 1, 2011, Universal Communications grants options
that permit key executives to acquire 10 million of the
company’s $1 par common shares within the next 8 years, but
not before December 31, 2014 (the vesting date). The exercise
price is the market price of the shares on the date of grant, $35
per share. The fair value of the options, estimated by an
appropriate option-pricing model, is $8 per option.
January 1, 2011
No entry
Calculate total compensation expense:
           $8             estimated fair value per option
     x     10 million     options granted
     = $80 million        total compensation

The total compensation is allocated to expense over the 4-year
service (vesting) period: 2011 - 2014
     $80 million ÷ 4 years = $20 million per year
December 31, 2011, 2012, 2013, 2014                             ($ in millions)
Compensation expense ($80 million ÷ 4 years) .............          20
  Paid-in capital – stock options ...........................            20



                                                                    Illustration 19-2

                                                                              T19-5




                                                     19-11
Chapter 19 - Share-Based Compensation and Earnings Per Share



                            ESTIMATED FORFEITURES

     If a forfeiture rate of 5% was expected, annual compensation
      expense would have been $19 million ($76 / 4) instead of
      $20 million.
     During 2013, the third year, Universal revises its estimate of
      forfeitures from 5% to 10%. The new estimate of total
      compensation would then be $80 million x 90%, or $72
      million.
     The expense each year is the current estimate of total
      compensation that should have been recorded to date less the
      amount already recorded
    2011                                                        ($ in millions)
    Compensation expense ($80 x 95% x 1/4) ..................       19
      Paid-in capital –stock options ........................            19
    2012
    Compensation expense ($80 x 95% x 1/4) ..................       19
      Paid-in capital –stock options ........................            19
    2013
    Compensation expense ([$80 x 90% x ¾] – [$19 + 19])..           16
      Paid-in capital –stock options ........................            16
    2014
    Compensation expense ([$80 x 90% x 4/4] – [$19 + 19 + 16])      18
      Paid-in capital –stock options ........................            18

                                                                   Illustration 19-2A

                                                                              T19-6



                                                     19-12
Chapter 19 - Share-Based Compensation and Earnings Per Share



                      WHEN OPTIONS ARE EXERCISED
If half the options (five million shares) are exercised on July 11,
2014, when the market price is $50 per share, the following journal
entry is made:

July 11, 2014                                                          ($ in millions)
Cash ($35 exercise price x 5 million shares) .......................    175
Paid-in capital - stock options (1/2 account balance) ....               40
  Common stock (5 million shares at $1 par per share) .....                    5
  Paid-in capital – excess of par (to balance) ...............               210



   If options that have vested expire without being exercised, the
following journal entry is made (assuming none of the options
were exercised):

                                                                       ($ in millions)
Paid-in capital – stock options (account balance)                         80
  Paid-in capital – expiration of stock options                                80




                                                                                    T19-7




                                                     19-13
Chapter 19 - Share-Based Compensation and Earnings Per Share



                      PLANS WITH PERFORMANCE OR
                          MARKET CONDITIONS
The way we account for such plans depends on whether the condition is
performance-based or market-based.

Plans with Performance Conditions
     If compensation from a stock option depends on meeting a
      performance target, then whether we record compensation depends
      on whether or not we feel it’s probable the target will be met.
     If the initial expectation is that it is not probable that the target will
      be met, we record no annual compensation expense. If, after two
      years, the expectation is that it is probable that the target will be met,
      we record the cumulative effect on compensation in 2013 earnings
      and record compensation thereafter:

          2013
          Compensation expense ([$80 x ¾] - $0) ..........        60
             Paid-in capital –stock options ................           60
          2014
          Compensation expense ([$80 x 4/4] - $60) ......         20
             Paid-in capital –stock options ................           20
Plans with Market Conditions
     If the award contains a market condition (e.g., a share option with an
      exercisability requirement based on the stock price reaching a
      specified level), then we recognize compensation expense regardless
      of when, if ever, the market condition is met.


                                                                            T19-8




                                                     19-14
Chapter 19 - Share-Based Compensation and Earnings Per Share



INTERNATIONAL FINANCIAL REPORTING STANDARDS


Recognition of Deferred Tax Asset for Stock Options. Under
U.S. GAAP, a deferred tax asset is created for the cumulative
amount of the fair value of the options expensed. Under IFRS, the
deferred tax asset isn’t created until the award is ―in the money;‖
that is, has intrinsic value.



                                                               T19-9




                                                     19-15
Chapter 19 - Share-Based Compensation and Earnings Per Share



                 EMPLOYEE SHARE PURCHASE PLANS

                    Permit employees to buy shares directly from their
                    company.
                   Usually the plan is considered compensatory, and
                    compensation expense is recorded.
                   Assume an employee buys shares (no par) under an
                    ESPP plan for $850 rather than the current market
                    price of $1,000. The $150 discount is recorded as
                    compensation expense:

                     Cash (discounted price)             850
                     Compensation expense ($1,000 x 15%) 150
                        Common stock (market value)          1,000




                                                                    T19-10




                                                     19-16
Chapter 19 - Share-Based Compensation and Earnings Per Share




                EARNINGS PER SHARE
       In the most basic setting, earnings per share is simply a
        company’s earnings (or loss) divided by the number of shares
        outstanding.


   Sovran Metals Corporation reported net income of $154 million
   in 2011. (Its tax rate was 40%).

         Common stock
          January 1, 2011                   60 million shares outstanding

                               (in millions, except per share amount)

Basic EPS:
                                   net
                                 income
                                  $154
                                                               = $2.57
                                    60
                                shares
                              outstanding




                                                                            T19-11




                                                     19-17
Chapter 19 - Share-Based Compensation and Earnings Per Share




                  ISSUANCE OF NEW SHARES

 If the number of shares has changed, it’s necessary to find the
        weighted average of the shares outstanding during the period
        the earnings were generated. Any new shares issued are time-
        weighted by the fraction of the period they were outstanding
        and then added to the number of shares outstanding for the
        entire period.



 Sovran Financial Corporation reported net income of $154
million for 2011 (tax rate 40%). Its capital structure included:
        Common stock
        January 1  60 million common shares were outstanding
    March 1                     12 million new shares were sold
   Basic EPS:
                          (amounts in millions, except per share amount)

                                   net
                                 income
                                  $154                             $154
                                                               =           = $2.20
                            60        + 12 (10/12)                  70
                         shares            new
                        at Jan. 1         shares
                                                                                T19-12




                                                     19-18
Chapter 19 - Share-Based Compensation and Earnings Per Share



                STOCK DIVIDENDS AND STOCK SPLITS

 The additional shares created by a stock dividend or split are
        not weighted for the time period they were outstanding.
        Shares outstanding prior to the stock distribution are
        retroactively restated to reflect the increase in shares – that is,
        treated as if the distribution occurred at the beginning of the
        period.
 Sovran Financial Corporation reported net income of $154
million in 2011 (tax rate 40%). Its capital structure included:
     Common stock
     January 1  60 million common shares were outstanding
     March 1    12 million new shares were sold
    June 17    A 10% stock dividend was distributed
   Basic EPS:
                           (amounts in millions, except per share amount)
                                 net
                               income
                                  $154                              $154
                                                                =           = $2.00
                  60 (1.10)             + 12 (10/12) (1.10)          77
                shares                     new
               at Jan. 1                  shares
                              ___ stock dividend ___
                                     adjustment



                                                                                 T19-13




                                                     19-19
Chapter 19 - Share-Based Compensation and Earnings Per Share



                         REACQUIRED SHARES
 The number of reacquired shares is time-weighted for the
        fraction of the year they were not outstanding, prior to being
        subtracted from the number of shares outstanding.
 Sovran Financial Corporation reported net income of $154
million in 2011 (tax rate 40%). Its capital structure included:
     Common stock
     January 1     60 million common shares were outstanding
     March 1       12 million new shares were sold
     June 17       A 10% stock dividend was distributed
    October 1                  8 million shares were reacquired as treasury
                                stock
   Basic EPS:
                          (amounts in millions, except per share amount)
                                net
                              income
                                  $154                                            $154
                                                                              =            = $2.05
         60 (1.10) + 12 (10/12) (1.10)                         – 8 (3/12)           75
          shares              new                               treasury
         at Jan. 1           shares                              shares
                  ___ stock dividend ___
                        adjustment*
   * not necessary for the treasury shares since they were reacquired after the stock dividend and
     thus already reflect the adjustment (that is, the shares repurchased are 8 million ―new‖ shares)

                                                                                              T19-14




                                                     19-20
Chapter 19 - Share-Based Compensation and Earnings Per Share



      EARNINGS AVAILABLE TO COMMON SHAREHOLDERS

 Preferred dividends are subtracted from net income so that
         ―earnings available to common shareholders‖ is divided by
         the weighted average number of common shares.
  Sovran Financial Corporation reported net income of $154
 million in 2011 (tax rate 40%). Its capital structure included:
   Common stock
   January 1      60 million common shares were outstanding
   March 1        12 million new shares were sold
   June 17        A 10% stock dividend was distributed
   October 1      8 million shares were reacquired as treasury
                  stock
 Preferred stock, nonconvertible
   January 1-December 31         5 million 8%, $10 par, shares
   Basic EPS:
                          (amounts in millions, except per share amount)
                                net         preferred
                              income        dividends
                               $154          – $4 *                             $150
                                                                            =          = $2.00
         60 (1.10) + 12 (10/12) (1.10)                         – 8 (3/12)       75
      shares                   new                              treasury
     at Jan. 1               shares                              shares
                  ___ stock dividend ___
                         adjustment
   * 5,000,000 x $10 x 8%
                                                                                        T19-15




                                                     19-21
Chapter 19 - Share-Based Compensation and Earnings Per Share




           COMPLEX CAPITAL STRUCTURE
Potential common shares — Securities that, while not being
   common stock, may become common stock through their
   exercise or conversion and, therefore, may ―dilute‖ (reduce)
   EPS.
    Examples:              Convertible preferred stock, stock options, rights,
                           or warrants, and contingently issuable securities
Complex capital structure — If potential common shares are
  outstanding
        A firm with a complex capital structure reports two EPS
        calculations:

                 Basic EPS ignores the dilutive effect of potential
                  common shares.

                 Diluted EPS incorporates the dilutive             effect of
                  potential common shares. The dilutive              effect is
                  included essentially by ―pretending‖ the          securities
                  already have been exercised, converted, or        otherwise
                  transformed into common shares.



                                                                        T19-16




                                                     19-22
Chapter 19 - Share-Based Compensation and Earnings Per Share



       OPTIONS, RIGHTS, AND WARRANTS
Stock options, stock rights, and stock warrants give their holders the right to exercise
their option to purchase common stock, usually at a specified exercise price. The
dilution that would result from their exercise should be reflected in the calculation of
diluted EPS.

       Incentive stock options
        Executive stock options granted in 2009, exercisable after 2010 for 15 million
        common shares* at an exercise price of $20 per share. The average market
        price was $25.
                                                                *adjusted for the stock dividend

Basic EPS                    (amounts in millions, except per share amounts)
                                   net           preferred
                                 income          dividends
                                   $154              – $4                             $150
                                                                          =                        = $2.00
   60 (1.10) + 12 (10/12) (1.10)              – 8 (3/12)                                75
      shares       new                          treasury
     at Jan. 1    shares                         shares
          ___ stock dividend ___
                 adjustment
Diluted EPS
      net            preferred
    income           dividends
    $154              – $4                                                          $150
____________________________________________________________________            =    _____   = $1.92
 60 (1.10) + 12 (10/12) (1.10) – 8 (3/12)                  + (15 – 12a)              78
shares             new              treasury           exercise
at Jan. 1         shares             shares           of options
            __ stock dividend ___
               adjustment
                                          a Shares Reacquired for Diluted EPS
                                                15    million shares
                                            x $20      (exercise price)
                                              $300    million
                                           ÷ $25       (average market price)
                                                12    million shares reacquired
                                                                                                     T19-17



                                                     19-23
Chapter 19 - Share-Based Compensation and Earnings Per Share



           Proceeds for Calculating Reacquired Shares
     The ―proceeds‖ for the calculation should include:
1. the amount received from the hypothetical exercise of the options
   ($300 million in our illustration).
2. the total compensation from the award that's not yet expensed. If
   the fair value of an option had been $4 at the grant date, the total
   compensation would have been 15 million shares times $4, or $60
   million.

      In our illustration, the options were fully vested before 2011, so all
      $60 million already had been expensed. If the options had been only
      half vested, half the compensation would have been unexpensed and
      $30 million would have been added to the $300 million proceeds.
3. the "excess tax benefit." We expense the fair value of stock options at
   the date of grant. If the options were non-qualified options, the
   corporation receives a tax deduction at exercise equal to the difference
   between the stock's market value and its exercise price. In our
   illustration, the options were incentive stock options, hence no tax
   benefit. Had they been non-qualified options, the proceeds also would
   have included a $6 million excess tax benefit:
           $25      market price during 2011 (& price at hypothetical exercise)
           (20)     exercise price
           $ 5      tax deduction at hypothetical exercise
            (4)     fair value at grant date (& amount expensed over the vesting period)
           $ 1      excess tax deduction per option
          x 15      million options
           $15      million excess tax deduction
          x 40%     tax rate
           $ 6      million excess tax benefit

                                                                                  T19-18




                                                     19-24
Chapter 19 - Share-Based Compensation and Earnings Per Share



          Restricted Stock Awards in EPS Calculations
     Restricted stock awards are included using the treasury stock method.
     That is, the shares are added to the denominator and then reduced by
     the number of shares that can be bought back with the ―proceeds‖ at
     the average market price of the company’s stock during the year. The
     cash proceeds are zero since executives don’t pay to acquire their
     shares.
    The proceeds for the EPS calculation include the total compensation
     that’s not yet expensed. For an example, assume total compensation
     for the award is $60 million ($12 market price per share x 5 million
     shares). If the stock award vests over four years, it is expensed as $15
     million each year for four years. At the end of 2011, the first year, $45
     million remains unexpensed, so $45 million would be the assumed
     proceeds in an EPS calculation. If the market price remains at $12, the
     $45 million will buy back 3.75 million shares:

            No adjustment to the numerator
      5 million – 3.75* million = 1.25 million

                *Assumed purchase of treasury shares
                      $45 million
                     ÷ $12 (average market price)
                       3.75 million shares

     The proceeds would be increased (or decreased) by any tax benefits
        that would be added to (or deducted from) paid-in capital when the
        eventual tax deduction differs from the amount expensed. Since that
        occurs when the stock price at vesting differs from the stock price at
        the grant date, this component is zero in this example.

                                                                         T19-19




                                                     19-25
Chapter 19 - Share-Based Compensation and Earnings Per Share




                  CONVERTIBLE SECURITIES

 For Diluted EPS, conversion into common stock is assumed
        to have occurred at the beginning of the period (or at the time
        the convertible security is issued, if that’s later). The
        denominator of the EPS fraction is increased by the additional
        common shares that would have been issued upon conversion.

 The numerator is increased by the interest (after-tax) or
        preferred dividends that would have been avoided if the
        convertible securities had not been outstanding due to having
        been converted.




                                                                 T19-20




                                                     19-26
Chapter 19 - Share-Based Compensation and Earnings Per Share



                             CONVERTIBLE BONDS
        Common stock
        January 1 60 million common shares were outstanding
        March 1     12 million new shares were sold
        June 17     A 10% stock dividend was distributed
        October 1 8 million shares were reacquired as treasury stock
        [The average market price for 2011 was $25 per share.]

        Preferred stock, nonconvertible
        January 1-December 31        5 million 8%, $10 par, shares

        Executive stock options
        Options granted in 2009, exercisable for 15 million common shares* at an
        exercise price of $20 per share

       Convertible bonds
        10%, $300 million face amount issued in 2010, convertible into 12 million
        common shares*
                                                                   *adjusted for the stock dividend


Basic EPS                    (amounts in millions, except per share amounts)

            $2.00 as before


Diluted EPS
      net            preferred                                          after-tax
    income           dividends                                      interest savings
    $154              – $4                                     + $30 – (40% x $30) $168
                                                                                       =        = $1.87

 60 (1.10) + 12 (10/12) (1.10) – 8 (3/12) + (15 – 12)                    + 12              90
shares              new                    treasury        exercise conversion
at Jan. 1          shares                   shares        of options of bonds

      ___ stock dividend ___
            adjustment*
                                                                                                      T19-21




                                                      19-27
Chapter 19 - Share-Based Compensation and Earnings Per Share



            CONVERTIBLE PREFERRED STOCK
        Assume the preferred stock is convertible into common shares:
       Preferred stock, convertible
        5 million, 8%, cumulative, $10 par, shares, convertible into 3 million
        common shares*
                                                                     *adjusted for the stock dividend

Basic EPS                  (amounts in millions, except per share amounts)
      net            preferred
    income           dividends
    $154              – $4                                                                     $150
                                                                                           =            =   2.00
 60 (1.10) + 12 (10/12)(1.10) – 8 (3/12)                                                         75
shares            new                  treasury
at Jan. 1        shares                 shares

      ___ stock dividend ___
             adjustment




Diluted EPS
      net            preferred                                     after-tax
    income           dividends                                 interest savings
    $154              – $4                             + $30 – (40% x $30)                       $172
                                                                                           =            =   $1.85
 60 (1.10) + 12 (10/12)(1.10) – 8 (3/12) + (15 – 12) + 12                             +3         93
shares            new                     treasury       exercise       conv.      conversion
at Jan. 1        shares                    shares       of options        of      of preferred
                                                                        bonds        shares
        ___ stock dividend ___
               adjustment




                                                                                                        T19-22




                                                     19-28
Chapter 19 - Share-Based Compensation and Earnings Per Share




                  ANTIDILUTIVE SECURITIES

 At times, the effect of the conversion or exercise of potential
        common shares would be to increase, rather than decrease,
        EPS. These we refer to as ―antidilutive‖ securities. Such
        securities are ignored when calculating diluted EPS.


       Stock warrants
        Warrants granted in 2010, exercisable for 4 million common
        shares* at an exercise price of $32.50 per share
               *adjusted for the stock dividend

          Calculations:
          The calculations of both basic and diluted EPS are unaffected by the
          warrants because the effect of exercising the warrants would be antidilutive.



 The $32.50 exercise price is higher than the market price,
        $25, so to assume shares are sold at the exercise price and
        repurchased at the market price would mean reacquiring more
        shares than were sold.




                                                                                T19-23




                                                     19-29
Chapter 19 - Share-Based Compensation and Earnings Per Share



       CONTINGENTLY ISSUABLE SHARES

 At times, contingent shares are issuable to shareholders of an
        acquired company, certain key executives, or others in the
        event a certain level of performance is achieved. Contingent
        performance may be a desired level of income, a target stock
        price, or some other measurable activity level.

 When          calculating EPS, contingently issuable shares are
        considered to be outstanding in the computation of diluted
        EPS if some target performance level already is being met
        (assumed to remain at existing levels until the end of the
        contingency period).       For example, assume 3 million
        additional shares will become issuable to certain executives in
        the following year (2012) if net income that year is $150
        million or more. If net income in 2011 was $154 million, the
        additional shares would be considered outstanding in the
        computation of diluted EPS by simply adding 3 million
        additional shares to the denominator of the EPS fraction.
Assumed issuance of contingently issuable shares (diluted
EPS):
      no adjustment to the numerator

                                     +3
                                  additional
                                    shares
                                                                 T19-24




                                                     19-30
Chapter 19 - Share-Based Compensation and Earnings Per Share




             FINANCIAL STATEMENT PRESENTATION

         Basic and diluted EPS data are reported on the face of the
          income statement for all periods presented. Companies
          without potential common shares present basic EPS only.
          Disclosure notes should provide additional disclosures
          including:
         A reconciliation of the numerator and denominator used in
          the basic EPS computations to the numerator and the
          denominator used in the diluted EPS computations.
         Any adjustments to the numerator for preferred dividends.
         Any potential common shares that weren’t included
          because they were antidilutive.
         Any transactions that occurred after the end of the most
          recent period that would materially affect earnings per
          share.

          When the income statement includes one or more items
       that require separate presentation within the statement, EPS
       data (both basic and diluted) must also be reported separately
       for income from continuing operations and net income. Per
       share amounts for discontinued operations, extraordinary
       items, and the cumulative effect of an accounting change are
       disclosed either on the face of the income statement or in the
       notes to financial statements.
                                                               T19-25




                                                     19-31
Chapter 19 - Share-Based Compensation and Earnings Per Share



INTERNATIONAL FINANCIAL REPORTING STANDARDS

Earnings per Share. FASB ASC 260 – Earnings per Share was
issued as part of a joint project with the IASB to eliminate
differences between SFAS 128 - Earnings per Share and IAS 33 -
Earnings per Share. Now, the denominator for the earnings per
share (EPS) calculation is the same under both US GAAP and
IFRS. The numerator still can differ because the components of
net income often are different under US GAAP and IFRS.

                                                               T19-26




                                                     19-32
Chapter 19 - Share-Based Compensation and Earnings Per Share



                       STOCK APPRECIATION RIGHTS
 When an SAR is considered to be equity (because the
  employer can elect to settle in shares), 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.
 When an SAR is considered to be a liability (because the
  employee can elect to receive cash upon settlement), the
  amount of compensation (and related liability) is estimated
  each period and continually adjusted to reflect changes in the
  fair value of the SARs until the compensation is finally paid.
 The current expense (and 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.



                                                               T19-27




                                                     19-33
Chapter 19 - Share-Based Compensation and Earnings Per Share



                       STOCK APPRECIATION RIGHTS
    Universal Communications grants 10 million SARs to key executives at January
    1, 2011. Upon exercise, the SARs entitle executives to receive cash or stock
    equal in value to the excess of the market price at exercise over the share price at
    the date of grant. The $1 par common shares have a current market price of $10
    per share. The SARs vest at the end of 2014 (cannot be exercised until then) and
    expire at the end of 2013. The fair value of the SARs, estimated by an
    appropriate option pricing model, is $8 per SAR at January 1, 2011. The fair
    value re-estimated at December 31, 2011, 2012, 2013, 2014 and 2013, is $8.40,
    $8, $6, $4.30, and $5, respectively.

    January 1, 2011
    No entry

    December 31, 2011                                                  ($ in millions)
    Compensation expense ($8.40 x 10 million x 1/4)                        21
      Liability – SAR plan                                                       21

    December 31, 2012
    Compensation expense ([$8 x 10 million x 2/4] – 21)                    19
      Liability – SAR plan                                                       19

    December 31, 2013
    Compensation expense ([$6 x 10 million x 3/4] – 21 – 19)                 5
      Liability – SAR plan                                                        5

    December 31, 2014
    Liability – SAR plan                                          2
       Compensation expense ([$4.30 x 10 million x 4/4] –21–19–5)                 2




                                                                                  T19-28



                                                     19-34
Chapter 19 - Share-Based Compensation and Earnings Per Share



                       STOCK APPRECIATION RIGHTS
                                               (CONTINUED)

  The liability continues to be adjusted after the service period if the rights
haven’t been exercised yet.

    December 31, 2013                                                                  ($ in millions)
    Compensation expense ([$5 x 10 million x all] –21–19–5+2)                             7
      Liability – SAR plan ..............................................                       7

   It’s necessary to continue to adjust both compensation expense and the
liability until the SARs ultimately either are exercised or lapse.
   Assume for example that the SARs are exercised on October 11, 2013,
when the share price is $14.50, and executives choose to receive the market
price appreciation in cash:

    October 11, 2013                                                                   ($ in millions)
    Liability – SAR plan....................................................              5
       Compensation expense ([$4.50 x 10 million x all] –50)                                    5

    Liability – SAR plan (balance) .....................................                45
       Cash.........................................................................          45




                                                                                                T19-29




                                                      19-35
Chapter 19 - Share-Based Compensation and Earnings Per Share



                            Suggestions for Class Activities
1.      Research Activity
Microsoft reported the following in its 2008 annual report:

Employee Stock Purchase Plan. We have an employee stock purchase plan for all eligible
employees. Compensation expense for the employee stock purchase plan is recognized in accordance
with SFAS No. 123(R). Shares of our common stock may be purchased by employees at three-month
intervals at 90% of the fair market value on the last day of each three-month period. Employees may
purchase shares having a value not exceeding 15% of their gross compensation during an offering
period.


Suggestions:

Have students describe way Microsoft accounts for shares purchased under this plan.

Note:

Since the discount to employees is 15%, the discount is considered to be compensation and that
amount is recorded as expense.

2.      Research Activity
GAAP requires reporting both basic and diluted EPS, but there is some latitude in how these data are
reported within the financial statements.

Suggestions:

Have students locate financial statements of companies with which they are familiar. You may want
them to use the Internet where EDGAR at http://www.sec.gov/edgar.shtml or specific corporate sites
will provide financial statements, seek out hard copy financial statements, or make their own choice
in how to locate the reports. Ask them to:

      1. Indicate whether EPS data are reported on the income statement for basic, diluted, or both.
         Are calculations explained in more detail in the footnotes?

      2. Indicate whether EPS data are reported for both income from continuing operations and net
         income.

      3. Indicate whether per share amounts also are reported for:
         1.   Discontinued operations.
         2.   Extraordinary items.

      4. Locate and explain the reconciliation of the numerator and denominator used in the
         computations.



                                                     19-36
Chapter 19 - Share-Based Compensation and Earnings Per Share




3.      Real World Scenario
Time Warner, Inc. reported first quarter profits from operations of $52 million, or a loss of 5 cents a
share.

Suggestions:

Have students consider this statement. Ask them to suggest how it might be true.

Note:

The loss per share is due to the fact that preferred dividends were deducted from earnings before
dividing by the weighted average number of shares outstanding.



4.      Real World Scenario
Analysts attach great significance to earnings announcements. For that reason, companies are
particularly eager to meet earnings expectations. This desire has contributed to a relatively recent
trend, especially among technology firms, to report pro forma earnings per share.

Suggestions:

Ask students to perform an Internet search for companies that recently reported pro forma EPS.
Have them compare those numbers with GAAP EPS and describe the difference. Have them
evaluate the value of pro forma reporting of earnings.

Note:

Essentially, pro forma earnings are actual (GAAP) earnings reduced by any expenses the reporting
company feels are unusual and should be excluded. Pro forma results of a company always are better
than the real results.

When companies report pro forma results, they argue they are trying to help investors by providing
numbers that more accurately reflect their normal business activities, because they exclude unusual
expenses. Critics have argued otherwise. Due to the purely discretionary nature of pro forma
numbers and several infamous instances of abuse, it’s important to determine precisely what
expenses are excluded and what the actual GAAP numbers are.




                                                     19-37
Chapter 19 - Share-Based Compensation and Earnings Per Share




5.      Real World Scenario
The Motley Fool, in an online article, “Bye-Bye, Stock Options,” said:


        Are you a faithful employee of a company that grants you stock options every now and then? If
        so, find a chair and sit down. I've got some bad news for you. Stock options may soon go the
        way of the dodo bird and saber-toothed tiger. Media conglomerate Time Warner, for example,
        recently announced plans to significantly cut back on its options issuance, eliminating them
        entirely for most employees. Why is this happening?

Suggestions:

Ask students to hypothesize as to ―why this is happening.‖

Note:

The Financial Accounting Standards Board (FASB) now requires companies to expense stock
options. Previously, many firms chose to have their cake and eat it, too – issue options as
compensation with no impact on their bottom lines. Now firms are increasingly choosing to do away
with options in favor of stock awards or other incentives, at least to some degree, to avoid taking a
big hit on their income statements.

6.      Professional Skills Development Activities
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis, and judgment skills.

  Communication Skills. In addition to Communication Cases 19-2 and 19-8, Judgment Case 19-7
    can be adapted to ask students to assume the role of the consultant and write a memo to the
    client explaining the paradox. Ethics Case 19-3 and Real World Case 19-15 are suitable for
    student presentation(s). Real World Case 19-6 and Real World Case 19-15 do well as group
    assignments. Questions 19-6 and 19-19 create good class discussions.

  Research Skills. In their professional lives, our graduates will be required to locate and extract
     relevant information from available resource material to determine the correct accounting
     practice, perhaps identifying the appropriate authoritative literature to support a decision.
     Research Cases 19-12 and 19-17 as well as Real World Case 19-9 provide excellent
     opportunities to help students develop this skill. In addition, Problem 19-8 can be adapted to
     require students to research the authoritative literature on performance plans.

  Analysis Skills. The ―Broaden Your Perspective‖ section includes Analysis Cases that direct
    students to gather, assemble, organize, process, or interpret date to provide options for making
    business and investment decisions. In addition to Analysis Cases 19-10, 13, 14, and 16,
    Problem 19-1, Real World Cases 19-4, 9, and 15, and Communication Case 19-2 also provide
    opportunities to develop analysis skills.



                                                     19-38
Chapter 19 - Share-Based Compensation and Earnings Per Share




  Judgment Skills. The ―Broaden Your Perspective‖ section includes Judgment Cases that require
     students to critically analyze issues to apply concepts learned to business situations in order to
     evaluate options for decision-making and provide an appropriate conclusion. In addition to
     Judgment Case 19-7, Ethics Case 11 also requires students to exercise judgment.




                                    Assignment Chart
                                    Learning                                                     Est. time
            Questions              Objective(s)                      Topic                        (min.)
              19-1                     1           Restricted stock                                     5
              19-2                     2           Stock options                                        5
              19-3                     2           Qualified option plans                               5
              19-4                     2           Performance and market conditions                    5
              19-5                    3, 5         EPS for a company with a simple capital
                                                   structure                                              5
              19-6                        5        Weighted average number of common shares               5
              19-7                      5, 6       Weighted average number of common shares               5
              19-8                        7        Preferred dividends when calculating EPS               5
              19-9                        4        Distinguish between basic and diluted EPS              5
             19-10                        8        Incorporate the dilutive effect of stock options       5
             19-11                        9        Convertible securities                                 5
             19-12                        9        Convertible securities                                 5
             19-13                       10        Antidilutive securities                                5
             19-14                       11        EPS; ―proceeds‖ in the treasury stock method           5
             19-15                       12        Contingently issuable shares                           5
             19-16                        9        Convertible securities actually converted              5
             19-17                       13        EPS disclosures                                        5
             19-18                       13        EPS disclosures                                        5
             19-19                       A         Fair value                                             5
             19-20                       B         SARs                                                   5

          Brief                      Learning                                                    Est. time
         Exercises                 Objective(s)                      Topic                            (min.)
              19-1                     1           Restricted stock award                                5
              19-2                     2           Stock options                                         5
              19-3                     2           Stock options; forfeiture                             5
              19-4                     2           Stock options; exercise                               5
              19-5                     2           Stock options; expiration                             5
              19-6                     2           Performance-based options                             5
              19-7                     2           Performance-based options                             5
              19-8                     2           Performance-based options                             5
              19-9                     2           Options with market-based conditions                  5


                                                     19-39
Chapter 19 - Share-Based Compensation and Earnings Per Share




             19-10                      5, 6       EPS; shares issued, shares retired               5
             19-11                        7        EPS; nonconvertible preferred shares             5
             19-12                        8        EPS; stock options                               5
             19-13                        9        EPS; convertible preferred shares                5
             19-14                       11        EPS; restricted stock award                      5

                                    Learning                                                   Est. time
            Exercises              Objective(s)                    Topic                         (min.)
              19-1                       1      Restricted stock award plan                          15
              19-2                       1      Restricted stock award plan                          15
              19-3                       1      Restricted stock award plan                          10
              19-4                       1      Restricted stock award plan; forfeitures
                                                anticipated                                          15
              19-5                       2      Stock options                                        15
              19-6                       2      Stock options                                        20
              19-7                       2      Stock options                                        20
              19-8                       2      Stock options                                        20
              19-9                       3      Employee share purchase plan                         20
             19-10                     5, 6     Shares issued; stock dividend                        10
             19-11                     5, 6     Treasury stock; new shares; stock dividends; two
                                                years                                                20
             19-12                   5, 6, 7    Stock dividend; nonconvertible preferred stock       10
             19-13                   5, 6, 7    Net loss; nonconvertible preferred stock; shares
                                                sold                                                 10
             19-14                   5, 6, 7    Stock dividend; nonconvertible preferred stock;
                                                treasury shares; shares sold                         10
             19-15                  5, 6, 7, 8 Stock dividend; nonconvertible preferred stock;
                                                treasury shares; shares sold; stock options          20
             19-16                   6, 7, 8    Stock dividend; nonconvertible preferred stock;
                                                treasury shares; shares sold; stock options          20
                                                exercised
             19-17                  6, 7, 8, 9 Stock dividend; nonconvertible preferred stock;
                                                treasury shares; shares sold; stock options;
                                                convertible bonds                                    20
             19-18                  6, 7, 8, 9 Shares issued; stock options                          15
             19-19                     7, 9     Convertible preferred stock; convertible bonds       15
             19-20                      11      EPS; restricted stock                                15
             19-21                    1, 11     Record restricted stock; effect of EPS               15
             19-22                    6, 12     New shares; contingently issuable shares             15
             19-23                    6, 12     New shares; contingent agreements                    15
             19-24                    5-13      Concepts; terminology                                20
             19-25                       2      FASB codification research                           15
             19-26                 2, 3, 7, 13 FASB codification research                            25
             19-27                      B       Stock appreciation rights; settlement in shares      15
             19-28                      B       Stock appreciation rights; cash settlement           25



                                                     19-40
Chapter 19 - Share-Based Compensation and Earnings Per Share



       CPA/CMA                      Learning                       Est. time
     Exam Questions                Objective(s)           Topic      (min.)

            CPA-1                        2         Stock options       3
            CPA-2                        2         Stock options       3
            CPA-3                        6         Basic EPS           3
            CPA-4                        7         Basic EPS           3
            CPA-5                        8         Diluted EPS         3
            CPA-6                        9         Diluted EPS         3
            CPA-7                        9         Diluted EPS         3
            CMA-1                        2         Stock awards        3
            CMA-2                        2         Stock awards        3




                                                     19-41
Chapter 19 - Share-Based Compensation and Earnings Per Share


                                    Learning                                                    Est. time
            Problems               Objective(s)                      Topic                       (min.)
                  19-1                   2         Stock options; forfeiture; exercise              25
                  19-2                   2         Stock options; graded vesting                    35
                  19-3                   2         Stock options; graded vesting; measurement       35
                                                   using a single fair value per option
                  19-4                 2, 14       Stock options; graded vesting; IFRS              35
                 19-5                   2         Steve Job’s restricted stock; tax effects        40
                 19-6                   2         Stock option plan; deferred tax effect
                                                   recognized                                       40
                 19-7                   2         Stock option plan; deferred tax effect of a
                                                   nonqualifying plan                               40
                  19-8                   2         Performance share plan                           25
                  19-9             5, 6, 7, 13     Net loss; stock dividend; nonconvertible
                                                   preferred stock; treasury shares; shares sold;
                                                   extraordinary loss                               25
                 19-10                4, 5, 6      EPS from statement of retained earnings          20
                19-11                4, 5, 6      EPS from Statement of Shareholders’ Equity       25
                 19-12              4, 5, 6, 7     Nonconvertible preferred stock; treasury
                                                   shares; shares sold; stock dividend              15
                 19-13          4, 5, 6, 7, 8, 10 Nonconvertible preferred stock; treasury
                                                   shares; shares sold; stock dividend; options     20
                19-14          4, 5, 6, 7, 8, 10, Nonconvertible preferred stock; treasury
                                        11         shares; shares sold; stock dividend; options;
                                                   convertible bonds; contingently issuable
                                                   shares                                           40
                 19-15               7, 9, 10      EPS; convertible preferred stock; convertible    25
                                                   bonds; order of entry
                 19-16              4-10, 13       Antidilution                                     25
                 19-17              4, 5, 6, 9     Convertible bonds; treasury shares               20
                 19-18                  4-9        Options; convertible preferred; additional
                                                   shares                                           15
                 19-19                  4-9        Stock options; nonconvertible preferred;
                                                   convertible bonds; shares sold                   25
                19-20           1, 2, 4, 8, 11    Stock options; restricted stock; additional
                                                   components for ―proceeds‖ in treasury stock
                                                   method                                           40


                                Star Problems




                                                     19-42
Chapter 19 - Share-Based Compensation and Earnings Per Share




                                    Learning                                                Est. time
             Cases                 Objective(s)                   Topic                       (min.)
Real World Case 19-1                    1       Restricted stock; Microsoft                       25
Communication Case 19-2                 2       Stock options; basic concepts; prepare a memo     60
Ethics Case 19-3                        2       Stock options                                     25
Trueblood Accounting
 Case 19-4                              1, 2      Share-based plans                                   45
Real World Case 19-5                   1, 2, B    Share-based plans; Cisco                            45
Real World Case 19-6                      3       Stock purchase plan; Microsoft                      15
Ethics Case 19-7                          6       International Network Solutions                     25
Real World Case 19-8                      8       Per share data; stock options; antidilutive
                                                  securities; Sun Microsystems                        25
Analysis Case 19-9                  4, 5, 6, 7, 8 EPS concepts                                        25
Analysis Case 19-10                  5, 6, 7, 8 EPS; AAON, Inc.                                       25
Judgment Case 19-11                    4-7, 9     Where are the profits?                              40
Communication Case 19-12                  9       Dilution                                            45
Real World Case 19-13                    13       Reporting EPS; discontinued operations;
                                                  Alberto-Culver Company                              35

Analysis Case 19-14                      13        Analyzing financial statements; price-earnings
                                                   ratio; dividend payout ratio                       30
Research Case 19-15                      13        Determining and comparing PE ratios; retrieving
                                                   stock prices and earnings per share numbers
                                                   from the Internet; Microsoft; Intel                60
Analysis Case 19-16                      13        Kellogg’s EPS; PE ratio; dividend payout           25
Research Case 19-17                      13        FASB codification; locate and extract relevant
                                                   information and cite authoritative support for a
                                                   financial reporting issue; change in
                                                   classification of a share-based compensation
                                                   instrument                                         60

British Airways Case                     14        IFRS; accounting for share-based compensation
                                                   and earnings per share; British Airways       30


CPA Simulation 19-1                                Judgment; calculating and reporting earnings
                                                   per share; analyzing the financial statement
                                                   effects; communication; research




                                                     19-43

				
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