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Accounting for Equity Compensation

Sixth Edition

by Barbara A. Baksa

$25.00 for NCEO members; $35.00 for nonmembers

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Now more than ever, it is crucial for everyone involved with equity compensation in the U.S. to have a strong foundation in the financial accounting rules that govern equity compensation programs. This book, written by a leading expert, provides that foundation. It is updated for 2009 and covers the current accounting standard (Statement of Financial Accounting Standards No. 123 (revised 2004) ("SFAS No. 123(R)").

Publication Details

Format: Perfect-bound book, 146 pages
Edition: Sixth edition (February 2009)
Status: In stock

Contents

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
Glossary
Index

Excerpts

From Chapter 4, "Measurement of Expense"

Although SFAS No. 123(R) precludes including the likelihood of forfeiture as a model input, it does allow the use of models that incorporate a variety of other inputs, such as blackout periods or Rule 10b5-1 trading plans. In some cases, different types of stock options may require one to use a different model. Options in which vesting is contingent on performance goals related to stock price performance should be valued using a model that takes into account the likelihood of the price targets being achieved. Indexed options should be valued using a model that takes into account the possibility of the option price changing over time.

One challenge in applying lattice models to employee stock options is the amount of data required to apply these models. To determine the suboptimal exercise factor, it is necessary to analyze historical exercises based on the market value at the time of exercise, and the historical data must be relevant to the options the company is currently granting. If the options in the historical analysis were granted while the company was private and the company is now publicly held, or if the options were exercised in a different market environment than currently exists, the historical exercise behavior may not be indicative of how employees will exercise the current option grants. It may be necessary to analyze the historical transactions based on population data as of the time the exercises occurred so that trends can be identified by population characteristics, enabling the model to be applied differently to each group of employees. It is also necessary to analyze the probability of employees terminating while holding vested options, which is likely to differ by employee population. These two inputs require a substantial amount of exercise and termination data. In addition to these inputs, it is now necessary to estimate not just a single future volatility but how the stock volatility is expected to change over the contractual term of the option (usually a 10-year period). The same evaluation must be applied to the estimate of expected dividend yield.