Attention CEPI students: Since 2020, the CEPI curriculum has been all-digital, and the CEPI provides you digital access to the books, including this, as part of the exam fee. You still can buy the printed books from us as a supplement to the free digital access you receive from the CEPI. See our CEPI information page.
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 18th edition has been updated for 2022, including discussions of the newly available practical expedient for stock valuation adopted pursuant to ASU 2021-07 and the SEC’s recent guidance on accounting for spring-loaded grants. (Note: this book does not address ESOP accounting.)
Table of 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
About the Author
About the NCEO
From Chapter 10, "Earnings per Share"
The same earnings per share approach applies to restricted stock and units payable in stock. Although restricted stock is issued at grant, for earnings per share purposes it is not considered issued and outstanding until it is vested; while the award is unvested, it is treated as a stock option with a price of $0.
Assume that a 10,000-share restricted stock award is granted on January 1, 20X1, when the market value is $10 per share, and is scheduled to vest in full four years after the date of grant. The company is calculating earnings per share for 20X3 (the company’s fiscal year corresponds with the calendar year), when the average market value is $25 per share. Since the stock is issued at no cost, there are no exercise proceeds that can be applied to repurchase stock.
The average unamortized expense for the award is still considered a source of repurchase funds. The average unamortized expense for the award in 20X3 (the reporting period) is $37,500 ($50,000 of unamortized expense at the beginning of the year and $25,000 of unamortized expense at the end of the year). This would enable the company to repurchase 1,500 shares at $25 per share (the average market value over the period). The net increase to the diluted earnings-per-share denominator as a result of the award is 8,500 shares (10,000 shares of restricted stock outstanding less 1,500 shares repurchased with the unamortized expense).
Where dividends are paid on unvested awards and the dividends are not subject to forfeiture, the company is required to use the two-class method when reporting earnings per share. The two-class method is typically used by companies with multiple classes of common stock or with other securities that participate in dividends paid to common stockholders. The method uses a formula to allocate earnings (the numerator of the EPS equation) to each security. Thus, separate EPS calculations would be required for the company’s unvested awards and the rest of its common stock. A full discussion of the two-class method of reporting EPS is beyond the scope of this book.