Accounting for Equity Compensation
A guide to accounting for stock options, ESPPs, SARs, restricted stock, and other such plans.
By Barbara Baksa
Format
Description
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 20th edition has been updated for 2024.
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 3, "Measurement Date"
Where the exercise or purchase price of shares that can be acquired under a grant is determined solely by reference to a future date (for example, an option for which the exercise price will be equal to the market value on a specified date in the future), the grant date does not occur until the price is set because the award holder does not benefit and is not adversely affected by fluctuations in the underlying stock price until that time. This does not mean that the grant date can never occur before the exercise price is set, however. If the relationship between the current share price and the exercise price is sufficient to understand the compensatory nature of the award, the grant date can occur before the exercise price becomes a fixed amount. For example, in an employee stock purchase plan that includes a look-back provision, the actual purchase price of the shares is not known until the purchase date. Nevertheless, the maximum purchase price is established at the beginning of the offering and is sufficient to establish the grant date of the arrangement. Likewise, where an option has an exercise price that is tied to an index (i.e., the exercise price increases or decreases in accordance with the index), the grant date may occur before the price is set if the other criteria for a grant date have been met.
From Chapter 5, "Expense Attribution"
Performance goals that are not related to the company’s stock price are referred to as “performance conditions” in the standard. For purposes of clarity, this book refers to these conditions as “non-market conditions.” These types of goals could be related to the activities or operations of the company or individual performance and might include specific revenue or earnings targets, or individual or departmental goals.
For options and awards that are subject to non-market performance conditions, the valuation is computed without regard to the performance conditions, and expense is recognized only for the portion of the option or award that vests. Companies are required to estimate the likelihood that the performance conditions will be achieved and adjust the expense recorded for the grants commensurately. As expectations as to vesting change, the expense recorded for the grants should be adjusted, and ultimately this expense recorded should be trued up to the actual vesting outcome.