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Accounting for Equity Compensation

(Print Version)

Eleventh Edition

by Barbara A. Baksa

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Accounting for equity compensation is one of the most challenging and complex areas of stock plan administration. Written in plain English for non-accountants, this book is a survival guide for understanding the impact of stock compensation on corporate financial statements. Authored by leading expert Barbara A. Baksa, the text provides an overview of the U.S. accounting principles that apply to stock plans, including how to compute and record award expense, dealing with modifications of awards, reconciling tax effects, and considerations for private companies. The final chapter provides a set of examples that apply the rules to various situations. The 11th edition has been updated for 2014. (Note: this book does not address ESOP accounting.)

Publication Details

Format: Perfect-bound book, 164 pages
Edition: Eleventh edition (February 2014)
Status: In stock


Chapter 1: Introduction: How Did We Get Here?
Chapter 2: Overview of the Standard
Chapter 3: Measurement Date
Chapter 4: Measurement of Expense
Chapter 5: Expense Attribution
Chapter 6: Accounting for Tax Effects
Chapter 7: Financing Exercise Transactions and Tax Withholding
Chapter 8: Modifications
Chapter 9: Business Combinations
Chapter 10: Earnings per Share
Chapter 11: Employee Stock Purchase Plans
Chapter 12: Stock Appreciation Rights
Chapter 13: Private Companies
Chapter 14: Disclosures
Chapter 15: Effective Date and Transition Methods
Chapter 16: Examples


From Chapter 5, "Expense Attribution"

An extra layer of complexity applies to options and stock appreciation rights (as opposed to restricted stock awards) with graded vesting. Here, not only is the forfeiture rate applied separately to each vesting tranche, but each tranche may also have a different fair value. Although not required, ASC 718 permits companies to value each vesting tranche as a separate option. This allows the company to assume different exercise behavior (e.g., a shorter expected term, if the Black-Scholes model is used for valuation) for the portions of the option that vest earlier. This will generally result in a lower fair value for the tranches that vest earlier and thus a lower overall expense.

Assume that the instruments granted on January 1, 20X6, in the prior example were stock options vesting in three annual increments of 100,000 shares each. The company computes the following fair values for each vesting increment:
  • The tranche vesting on January 1, 20X7, has a fair value of $8 per share and an aggregate fair value of $800,000.
  • The tranche vesting on January 1, 20X8, has a fair value of $10 per share and an aggregate fair value of $1,000,000.
  • The tranche vesting on January 1, 20X9, has a fair value of $12 per share and an aggregate fair value of $1,200,000.
  • The aggregate expense for the options before adjusting for forfeitures is $3,000,000 ($800,000 plus $1,000,000 plus $1,200,000).

During 20X6, employees holding 10% of the awards terminate, forfeiting their options in their entirety. The company expects this forfeiture rate to continue through the remaining vesting period. The expense for each vesting tranche would be adjusted for forfeitures (actual and expected) as follows:
  • For the tranche vesting on January 1, 20X7, $720,000 worth of shares have vested ($800,000 x 90%).
  • For the tranche vesting on January 1, 20X8, $810,000 worth of shares are expected to vest ($1,000,000 x 90% x 90%).
  • For the tranche vesting on January 1, 20X9, $874,800 worth of shares are expected to vest ($1,200,000 x 90% x 90% x 90%).
  • The aggregate expense for the awards, after adjusting for expected forfeitures, is $2,404,800 ($720,000 plus $810,000 plus $874,800).

The expense for each tranche is then recorded using either the straight-line or accelerated attribution method, as illustrated in tables 5.6 and 5.7.