Stock-Based Compensation in a DCF



How to Account for Stock Based Compensation

Steps

Calculating Compensation Value

  1. Distinguish between important dates.There are several important dates associated with stock compensation plans. Each one is essential to properly recording and reporting options plans. In order, they are:
  2. Choose a method for determining the value of the stock-based compensation.In order to be recorded in journal entries, the stock compensation must be appropriately valued. The two most common methods recognized by the Financial Accounting Standards Board (FASB) are intrinsic value and fair value methods.
    • Intrinsic value refers to the difference between the stock price when the stock is granted and the price of the stock at the earliest date the stock vests and can be sold.
    • Fair value bases the value of stock on a complex model of factors that estimates the value of the stock or option at the time of the grant.
    • Publicly-traded companies are required to use the fair value method. Non-public companies may use either method.

Making Journal Entries

  1. Make an entry to record compensation.Original stock compensation is recorded according to when the stocks or options become vested (available to the employee). The specifics of when this occurs are specific to individual employee stock compensation plans and are created at the discretion of the company. The entries made on the vesting date(s) are a debit to Compensation Expense and a credit to Additional Paid-In Capital, Stock Options, both for the fair value of the vested options or stocks.
  2. Record exercised options.All other entries for stock compensation plans will likely be made on the expiration date. Any exercised options will be recorded to reflect the increase in cash and change in common stock and options accounts. Continuing with the previous example, imagine that the employee decides to exercise 400 of his options. This would mean that he buys 400 shares of the stock at the option price.
    • The option price is , this would represent ,000 (400×{\displaystyle 400\times $50}) in cash coming in to the company. In addition, it would represent 40 percent (400 of 1000 total) of the stock options originally granted leaving the company.
    • However, this also means that the common stock shares created in the purchase must be recorded. This will be done at the par value. So, if the par value of the shares is , this would mean that the company has gained ,000 (×400{\displaystyle $5\times 400}) in common stock.
    • This transaction would be recorded at the expiration date of the options as a debit to Cash for ,000, a debit to Additional Paid-In Capital, Stock Options, for ,000, a credit to Common Stock for ,000, and, finally, a balancing credit to Additional Paid-In Capital, Common Stock, for ,000.
      • The balancing entry at the end represents the difference between the debits to Cash and Stock Options (,000 total) and the common stock credit (,000).
  3. Write off expired options.At the expiration date, any unexercised options are also recorded. In this case, having exercised 40 percent of their options over the vesting period, the employee has elected not to exercise the remaining 60 percent. This means that 60 percent of the original ,000 value, or ,000, will be written off as expired stock options. Specifically, a debit to Additional Paid-In Capital, Stock Options, will be made along with a credit to Additional Paid-In Capital, Expired Stock Options, both for the ,000 fair value of the expired options.
  4. Account for the employee stock-based compensation when completing your financial statements.How financial statements are presented is your prerogative, but you must include all stock-based compensation when distributing statements to your stockholders. Stock compensation should be recorded as an expense on the income statement. However, stock compensation expenses must also be included on the company's balance sheet and statement of cash flows.

Recording Compensation As an Employee

  1. Determine capital gains on the sale of the stock.When you sell the stock provided by your stock compensation plan, you must pay capital gains on your returns from the sale. These taxes are all that you will owe on your stock compensation gains if you have already reached the end of the required waiting period when you sell. Capital gains are determined as the difference between the market value at exercise and the market value at the selling date.
  2. File your taxes properly.Make sure to disclose all capital gains and losses on your income taxes. You should also include any stock sold before the required waiting period. Speak to a financial professional if you are unsure of when this waiting period ends. Failure to properly to report these gains can result in fines or criminal penalties.

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  • The accounting procedures and rules described in this article are specific to U.S. generally accepted accounting procedures (U.S. GAAP). Those entities using International Financial Reporting Standards (IFRS) for their accounting practices will need to follow the rules specific to IFRS.





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Date: 03.12.2018, 01:35 / Views: 32371