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Advanced Topics in Equity Compensation Accounting

Second Edition

by Takis Makridis

$35.00 for NCEO members; $50.00 for nonmembers

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Accounting is one of the most crucial areas in the equity compensation field. This book is not a general guide to the subject (for that, see our book Accounting for Equity Compensation by Barbara Baksa) but rather is an advanced study of some of the most important topics that arise. Author Takis Makridis, a leading expert in the field, selects a handful of issues spanning valuation and financial reporting. In this new edition, important updates are made to existing chapters, such as the ones on expected term and underwater option exchanges. This edition also includes two new chapters, one on the derivation and application of forfeiture rates and one on International Financial Reporting Standards 2 (IFRS 2).

Publication Details

Format: Perfect-bound book, 262 pages
Edition: Second edition (January 2011)
Status: In stock

Contents

Preface
Chapter 1: Valuation Models
Chapter 2: Expected Term
Chapter 3: Volatility Estimation
Chapter 4: Making Sense of Forfeiture Rates
Chapter 5: Expense Recognition for Market and Performance Awards
Chapter 6: Underwater Option Exchanges: Baseline Theory and Implementation Approaches 
Chapter 7: IFRS 2: Today and Tomorrow
Index

Excerpts

From Chapter 4, "Making Sense of Forfeiture Rates"

Although the Dynamic Model does not trigger more or less financial statement volatility, it does reduce the risk of bias or imprecision in how the amortization model is updated to incorporate new information on actual forfeitures. This is because it automates the process. So long as a company continues to believe its forfeiture rate is a reasonable steady-state expectation, it can leave the forfeiture rate unchanged in the model and feel comfortable that outlier events (too many or too few forfeitures) are being automatically managed within the amortization model.

Consider the two outlier situations introduced in the prior section: first, where the 8,000-unit award forfeits in Q2, and second, where only the 250-unit award forfeits during the first three quarters. Beginning with the first scenario, assume a monthly soft close of February (month 2) is being performed and the 8,000-unit award is forfeited on the first day of February. The amortization model would reverse expense recognized in January on the 8,000-unit award while recognizing more expense on all other awards than what was recognized on them in January (reflecting their higher probability of vesting). Then in March, the 8,000-unit award would be gone altogether from the calculations, and the 10% forfeiture rate would continue to be applied to all other surviving awards over the then-remaining vesting period.