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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 17th edition has been updated for 2021, with a newly revised and expanded chapter on accounting for modifications of equity awards and discussion of awards in which vesting is contingent on an IPO. (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 13, "Private Companies"
Another somewhat common practice among privately held companies is to grant options or awards in which vesting is contingent on the company’s IPO (or acquisition by another company). Oftentimes, the awards are subject to both service-based vesting conditions in addition to the IPO/CIC vesting condition. The period over which the service-based conditions are achieved often differs from the period in which the IPO/CIC must be achieved. The service-based conditions are often fulfilled over the three- or four-year period following grant, whereas the grants might allow for up to ten years for the IPO/CIC to be achieved. (This differs from more traditional performance awards in which vesting is contingent on operational or market conditions and in which the service and performance conditions are typically fulfilled over the same time period.)
As is the case for other types of awards that are subject to non-market performance conditions, expense should be recorded only to the extent that the performance condition (i.e., an IPO or CIC) is likely to achieved. But, unlike operational metrics, when the performance metric that vesting is contingent on is an IPO or CIC, the FASB has indicated that the likelihood of the condition being achieved should be considered to be 0% until the IPO or CIC is a certainty.
Thus, where vesting in options or awards is conditioned on an IPO or CIC, no expense is recorded for the grants until just before the consummation of the IPO or CIC. Once an IPO becomes certain, expense for the grants that will vest as a result of it is recorded commensurate with the portion of the service-based vesting period that has elapsed. Any expense attributable to service that has already been performed as of the date of the IPO is recorded immediately in full in the period of the IPO. Expense attributable to future service will be recorded in periods after the IPO as the service is performed.
For example, assume that an award with an aggregate grant date fair value of $100,000 was granted one year before the IPO. Vesting in the award is contingent upon both the IPO and the award holder completing four years of service (one year of which has been completed at the time of the IPO). In the period of the IPO, the company will record $25,000 of expense for the award, which is the expense attributable to the one year of service that has been completed. The remaining $75,000 of expense will be recorded over the three years in which the remaining service is completed. (This example assumes that the company accounts for forfeitures as they occur.)
If a grant’s service-based vesting conditions have been fully achieved as of the date of the IPO, all of the expense for the grant will be fully recognized in the period of the IPO. If the grant in our prior example had been granted at least four years before the IPO, the company would have recognized the full $100,000 of expense for the award in the period of the IPO.
Where the vesting event is an acquisition by another company, the awards will be accounted for in accordance with the principles that apply to business combinations; see chapter 9 for more information.