Accounting for Equity Compensation, 21st Ed.
A guide to accounting for stock options, ESPPs, SARs, restricted stock, and other such plans.
By Barbara Baksa
Format
Description
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. In addition, the text includes key comparisons to International Financial Reporting Standards.
The 21st edition has been updated for 2025, including a newly added discussion of how employee stock purchase plans affect earnings per share.
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
Glossary
About the Author
About the NCEO
Excerpts
From Chapter 11, "Employee Stock Purchase Plans"
11.3 Additional Considerations for ESPPs
Certain relatively common plan provisions can trigger modification accounting when invoked. These include a provision automatically withdrawing and re-enrolling participants when the market value on the purchase date is less than it was on their enrollment date and allowing participants to increase their contributions during an offering period. The occurrence of these events is viewed as a cancellation of the original option and an immediate grant of a replacement option, and is accounted for as a modification, described previously under "Modifications."
11.3.1 Automatic Reset and Rollover Mechanisms
Many ESPPs that have multiple purchases within a single offering period include a reset or rollover provision that is triggered when the fair market value has declined during the period. These provisions require that if the fair market value of the stock on the purchase date is less than the fair market value at the beginning of the offering, all employees enrolled in that offering are automatically withdrawn from the plan and immediately reenrolled in a new offering period. Under a reset provision, the employees are reenrolled for only the remainder of the current offering (for example, if the reset mechanism is triggered 6 months into a 24-month offering period, the employees are reenrolled for the remaining 18 months only). Under a rollover provision, the employees are reenrolled in new offering period equal to the length of the original period (for example, if the offering was originally 24 months in length, the employees are reenrolled in a new 24-month offering regardless of when the rollover mechanism is triggered).
ASC Section 718-50-55 addresses both reset mechanisms and rollover mechanisms, requiring that both be treated as a modification of the original option. To account for the modification, the employer continues to recognize all the cost associated with the original offering period but now also recognizes the incremental cost of the new offering period. The incremental cost is equal to the fair value of the new offering less the fair value of the original offering at the time the reset or rollover mechanism was triggered.
11.3.2 Increases in Contribution Rates
ASC Section 718-50-55 treats increases in contribution rates that occur during an offering period as modifications of the original option. By allowing employees to increase their contributions and thereby purchase additional shares under the offering, the employer is considered to have modified the terms of the original option. To account for the modification, the employer continues to recognize all the cost associated with the original option but now also recognizes the incremental cost of the new option. The incremental cost is equal to the fair value of the new option less the fair value of the original option at the time the increase occurred.
11.4 Earnings per Share Considerations
The effect of the shares issued under employee stock purchase plans must be included in the company's earnings per share, in the same manner as other types of equity arrangements. This section explains how to determine this effect for ESPPs in which employees' unused contributions to the plan are refundable in at least some circumstances (e.g., upon termination or withdrawal from the plan) and the plan results in the issuance of new or treasury shares.