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Accounting for Equity Compensation
by Barbara A. Baksa
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Format: PDF, 166 pages
Dimensions: 6 x 9 inches
Edition: 14th (March 2017)
Status: Available for electronic delivery
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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 1, "Introduction: How Did We Get Here?"In 2016, the FASB issued an amendment to ASC 718 that simplifies the guidance applicable to share withholding, forfeitures, and accounting for tax effects. The relevant sections of this book have been revised to reflect the amendments.
From Chapter 6, "Accounting for Tax Effects" (footnotes omitted)For arrangements that normally result in a tax deduction for the corporation, such as nonqualified stock options or restricted stock, the company records a deferred tax asset (DTA) based on the amount of expense recorded for the arrangement and also reduces tax expense commensurately in the period that the expense is recorded. The deferred tax asset represents the future tax deduction the company expects to receive (although the amount of the asset is always equal to expense recorded for the arrangement multiplied by the company's statutory tax rate —it is not an estimate of the actual tax savings that will be realized upon settlement). When the arrangement is ultimately settled (e.g., exercised or expired, in the case of nonqualified stock options, or vested/distributed, in the case of restricted stock/units), the tax deduction recognized by the company at that time is compared to the deferred tax asset previously recorded for the award, and any difference is recorded to tax expense. If the actual tax deduction exceeds the deferred tax asset, referred to as an "excess tax benefit," the difference reduces tax expense; conversely, if the actual tax deduction is less than the deferred tax asset, referred to as a "tax shortfall," the difference increases tax expense.
For example, assume a company grants a nonqualified stock option to purchase 10,000 shares of stock at $12 per share. The option has an aggregate fair value of $50,000 ($5 per share) and vests in full one year after the date of grant. Assume also that the company's combined corporate statutory tax rate is 40% (including both state and federal taxes). The company will record expense of $50,000 in the year over which the option vests. Because the company ultimately expects to claim a tax deduction for the option, the compensation expense recognized for the option reduces the company's tax expense by $20,000 ($50,000 × 40%). Thus, the net impact to the company's profitability is a reduction of only $30,000 rather than the full $50,000 of expense recognized for the option.
Table 6.1 illustrates the general ledger entries necessary to record the expense recognized for the option.
From Chapter 13, "Private Companies"Private companies also typically find it challenging to develop an appropriate expected term assumption, again due to lack of historical activity. ASC 718, as amended by ASU 2016-09, offers a practical expedient to calculated expected term that private companies can use (this practical expedient is not available to public companies, but, as noted in section 4.3.1 of chapter 4, SEC SAB No. 110 offers relief in this area to public companies). The practical expedient is available for options and SARs that meet the following conditions:
- The option or SAR has an exercise price equal to the fair market value on the date grant (the exercise price cannot be higher or lower than the grant date fair market value).
- The employee has only a limited time in which to exercise after termination of employment (typically only 30 to 90 days).
- The employee cannot sell or hedge the option or SAR.
- The option or SAR does not include a market condition.