Chapter 19: Share-Based Compensation ASC 718 (SFAS 123R) Learning Objectives 1. Accounting for stock award plans. 2. Accounting for stock options. 3. Accounting for employee share purchase plans. 4. Simple and a complex capital structure.

Share-Based Compensation Form of compensation in which the amount of the compensation employees receive is tied to the market price of company stock. An executive compensation plan is tied to performance in a strategy that uses compensation to motivate it recipients. These share-based compensation plans –stock awards, -stock options, and -stock appreciation rights, create shareholders’ equity. The nature of this compensation will impact the way earnings per share is calculated.

Share-Based Compensation Whichever form such a plan assumes, the accounting objective is to record the fair value of compensation expense over the periods in which related services are performed. This requires: 1. Determining the fair value of the compensation. 2. Expensing that compensation over the periods in which participants perform services.

Stock Award Plans FEATURES: The compensation is a grant of shares of stock. -The shares usually are restricted (non-vested) so that benefits are tied to continued employment. -Usually shares are subject to forfeiture if employment is terminated within some specified number of years from the date of grant. -The employee cannot sell the shares during the restriction period. => Between GRANT Date and VESTING Date. Typically, an executive compensation plan is tied to performance in a strategy that uses compensation to motivate it recipients. Restricted stock plans usually are tied to continued employment of the person receiving the award. The compensation associated with a share of restricted stock (or non-vested stock) is the market price at the grant date of an unrestricted share of the same stock. The amount is accrued as compensation expense over the service period for which participants receive the shares.

Stock Award Plans Compensation is a grant of shares of stock…. -The compensation is simply the market price of the stock at the grant date. -Compensation is accrued as expense over the service period for which participants receive the shares. -The service period usually is the period from the date of grant to when restrictions are lifted (the vesting date). -If restricted stock is forfeited, related entries previously made would simply be reversed. Typically, an executive compensation plan is tied to performance in a strategy that uses compensation to motivate it recipients. Restricted stock plans usually are tied to continued employment of the person receiving the award. The compensation associated with a share of restricted stock (or non-vested stock) is the market price at the grant date of an unrestricted share of the same stock. The amount is accrued as compensation expense over the service period for which participants receive the shares.

STOCK AWARD PLANS ILLUSTRATION Under its restricted stock award plan, Universal Communications grants 5 million of its $1 par common shares to certain key executives at January 1, 2011. The shares are subject to forfeiture if employment is terminated within 4 years. Shares have a current price of $12 per share. January 1, 2011 No entry Calculate total compensation expense: $12 Fair value per share x 5 million Shares awarded = $60 million Total compensation The total compensation is allocated to expense over the 4-year service (vesting) period: 2011 – 2014 as follows: $60 million ÷ 4 years = $15 million per year Typically, an executive compensation plan is tied to performance in a strategy that uses compensation to motivate it recipients. Restricted stock plans usually are tied to continued employment of the person receiving the award. The compensation associated with a share of restricted stock (or non-vested stock) is the market price at the grant date of an unrestricted share of the same stock. The amount is accrued as compensation expense over the service period for which participants receive the shares.

STOCK AWARD PLANS ILLUSTRATION Journal Entries: December 31, 2011, 2012, 2013, 2014 ($ in millions): Compensation expense ($60 million ÷ 4 years) 15 Paid-in capital – restricted stock 15   December 31, 2014 (On Vesting Date): Paid-in capital– restricted stock (5 million sh. at $12) 60 Common stock (5 million shares at $1 par) 5 Paid-in capital – excess of par (to balance) 55 If restricted stock is forfeited because, say, the employee quits the company, related entries previously made would simply be reversed. Typically, an executive compensation plan is tied to performance in a strategy that uses compensation to motivate it recipients. Restricted stock plans usually are tied to continued employment of the person receiving the award. The compensation associated with a share of restricted stock (or non-vested stock) is the market price at the grant date of an unrestricted share of the same stock. The amount is accrued as compensation expense over the service period for which participants receive the shares.

Exercise 19-1 Exercise 19-2 Exercise 19-4 STOCK AWARD PLANS Typically, an executive compensation plan is tied to performance in a strategy that uses compensation to motivate it recipients. Restricted stock plans usually are tied to continued employment of the person receiving the award. The compensation associated with a share of restricted stock (or non-vested stock) is the market price at the grant date of an unrestricted share of the same stock. The amount is accrued as compensation expense over the service period for which participants receive the shares.

Stock Option Plans Stock option plans give employees the option to buy a specified number of shares of the firm's stock, at a specified exercise price, during a specified period of time. The fair value is accrued as compensation expense over the service period for which participants receive the options, usually from the date of grant to when the options become exercisable (the vesting date). Stock option plans give employees the option to buy (a) a specified number of shares of the firm's stock, (b) at a specified exercise price, (c) during a specified period of time. The fair value is accrued as compensation expense over the service period for which participants receive the options, usually from the date of grant to when the options become exercisable (the vesting date).

Expense – The Great Debate Historically, options have been measured at their intrinsic value – the simple difference between the market price of the shares and the option price at which they can be acquired. If the market and exercise price are equal on the date of grant, no compensation expense is recognized even if the options provide executives with substantial income. Historically, options have been measured at their intrinsic value. The intrinsic value is the simple difference between the market price of the shares and the option price at which they can be acquired. For example, an option that permits an employee to buy $25 stock for $10, has an intrinsic value of $15. However, plans in which the exercise price equals the market value of the underlying stock at the date of grant have no intrinsic value and therefore result in zero compensation when measured this way. This is true even if the executives received substantial income from the stock options.

Failed Attempt to Require Expensing Opposition to a proposed FASB Statement to recognize expense for certain stock option plans have identified three objections. Options with no intrinsic value at issue have zero fair value and should not give rise to expense recognition. It is impossible to measure the fair value of compensation on the date of grant. Current practices have unacceptable economic consequences. The FASB proposed a new standard that would have required companies to measure options at their fair values at the time they are granted and to expense that amount over the appropriate service period. Opposition to a proposed FASB Statement for stock options identify three major objections. First, options with no intrinsic value at date of the issue have zero fair value and should not give rise to expense recognition. Second it is impossible to measure the fair value of the compensation expense at the date of grant. Third, the current accounting practices have unacceptable economic consequences.

Recognizing Fair Value of Options Accounting for stock options parallels the accounting for restricted stock we discussed earlier. We now are required to estimate the fair value of stock option on the grant date. The FASB now requires that compensation expense be measured using one of several option pricing models that deal with: 1. Exercise price of the option. 2. Expected term of the option. 3. Current market price of the stock. 4. Expected dividends. 5. Expected risk-free rate of return. 6. Expected volatility of the stock. Effective for fiscal years beginning after June 5, 2005, companies now are required to estimate the fair value of stock options on the grant date. Accounting for stock options parallels the accounting for restricted stock we discussed earlier. We now are required to estimate the fair value of stock options on the grant date. Most option pricing models consider the following variables when calculating price: Exercise price of the option. Expected term of the option. Current market price of the stock. Expected dividends. Expected risk-free rate of return. Expected volatility of the stock. The time between the date options are granted and the first date they can be exercised is the vesting period and usually is considered to be the service period over which the compensation expense is reported.

EXPENSING STOCK OPTIONS At January 1, 2011, Universal Communications grants options that permit key executives to acquire 10 million of the company’s $1 par common shares within the next 8 years, but not before December 31, 2014 (the vesting date). The exercise price is the market price of the shares on the date of grant, $35 per share. The fair value of the options, estimated by an appropriate option-pricing model, is $8 per option. January 1, 2011 No entry Calculate total compensation expense: $8 estimated fair value per option x 10 million options granted = $80 million total compensation

EXPENSING STOCK OPTIONS At January 1, 2011, Universal Communications grants options that permit key executives to acquire 10 million of the company’s $1 par common shares within the next 8 years, but not before December 31, 2014 (the vesting date). The exercise price is the market price of the shares on the date of grant, $35 per share. The fair value of the options, estimated by an appropriate option-pricing model, is $8 per option. The total compensation is allocated to expense over the 4-year service (vesting) period: 2011 - 2014 $80 million ÷ 4 years = $20 million per year December 31, 2011, 2012, 2013, 2014 ($ in millions) Compensation expense ($80 million ÷ 4 years) 20 Paid-in capital – stock options 20

EXPENSING STOCK OPTIONS ESTIMATED FORFEITURES   If a forfeiture rate of 5% was expected, annual compensation expense would have been $19 million ($76 / 4) instead of $20 million. During 2013, the third year, Universal revises its estimate of forfeitures from 5% to 10%. The new estimate of total compensation would then be $80 million x 90%, or $72 million. The expense each year is the current estimate of total compensation that should have been recorded to date less the amount already recorded. 3rd Year = $16M = ($80 million x 90% x ¾) – [$19 + 19]) 4th Year = $18M = ([$80 million x 90% x 4/4] – [$19 + 19 + 16])

EXPENSING STOCK OPTIONS ESTIMATED FORFEITURES   2011 ($ in millions) Compensation expense ($80 x 95% x 1/4) 19 Paid-in capital –stock options 19 2012 Compensation expense ($80 x 95% x 1/4) 19 Paid-in capital –stock options 19 2013 Compensation expense ([$80 x 90% x ¾] – [$19 + 19]) 16 Paid-in capital –stock options 16 2014 Compensation expense ([$80 x 90% x 4/4] – [$19 + 19 + 16]) 18 Paid-in capital –stock options 18

EXPENSING STOCK OPTIONS WHEN OPTIONS ARE EXERCISED If half the options (five million shares) are exercised on July 11, 2014, when the market price is $50 per share, the following journal entry is made: July 11, 2014 ($ in millions) Cash ($35 exercise price x 5 million shares) 175 Paid-in capital - stock options (1/2 account balance) 40 Common stock (5 million shares at $1 par per share) 5 Paid-in capital – excess of par (to balance) 210  

STOCK OPTIONS Exercise 19-5 Exercise 19-6 Exercise 19-8

EXPENSING STOCK OPTIONS WHEN VESTED OPTIONS EXPIRE WITHOUT BEING EXERCISED If options that have vested expire without being exercised, the following journal entry is made (assuming none of the options were exercised):   ($ in millions) Paid-in capital – stock options (account balance) 80 Paid-in capital – expiration of stock options 80 Exercise 19-7(#5) BE 19-2 & 5

EXPENSING STOCK OPTIONS PLANS WITH PERFORMANCE OR MARKET CONDITIONS The way we account for such plans depends on whether the condition is performance-based or market-based. Performance Target Example: An option may not be exercisable until a performance target is met. The target could be: -Divisional revenue, -Earnings per share, -Sales growth or -ROA. Market-related Targets: -A specified stock price; -A stock price change exceeding a particular index;

EXPENSING STOCK OPTIONS Plans with Performance Conditions If compensation from a stock option depends on meeting a performance target, then whether we record compensation depends on whether or not we feel it’s probable the target will be met. If the initial expectation is that it is not probable that the target will be met, we record no annual compensation expense. 2011: NO ENTRY 2012: NO ENTRY If, after two years, the expectation is that it is probable that the target will be met, we record the cumulative effect on compensation in 2013 earnings and record compensation thereafter: 2013 Compensation expense ([$80 x ¾] - $0) 60 Paid-in capital –stock options 60 2014 Compensation expense ([$80 x 4/4] - $60) 20 Paid-in capital –stock options 20 BE 19-6, BE 19-7, BE 19-8

EXPENSING STOCK OPTIONS Plans with Market Conditions If the award contains a market condition (e.g., a stock option with an exercisability requirement based on the stock price reaching a specified level), then we recognize compensation expense regardless of when, if ever, the market condition is met. Meaning, no special accounting is required!! REASON: The fair value estimate of the stock options based on Option Pricing Models already incorporated market conditions. BE 19-9

Plans With Graded-Vesting Rather than stock option plans vesting on a single date, more plans awards specify that recipients gradually become eligible to exercise their options rather than all at once. This is called “graded vesting.” Accounting for compensation expense may be handled: 2 The company may use a slightly more complex method because it usually results in lower expense. In this approach, we view each vesting group separately, as if it were a separate award. For example, a company may award stock options that vest 25% in the first year, 25% in second year, and 50% the third years. For accounting purposes we have three separate awards. 1 The company may estimate a single fair value for each of the options, even though they vest over different time periods, using a single weighted-average expected life of the options. Rather than stock option plans vesting on a single date, more plans awards specify that recipients gradually become eligible to exercise their options rather than all at once. This is called “graded vesting.” Accounting for compensation expense may be handled: The company may estimate a single fair value for each of the options, even though they vest over different time periods, using a single weighted-average expected life of the options. The company may use a slightly more complex method because it usually results in lower expense. In this approach, we view each vesting group separately, as if it were a separate award. For example, a company may award stock options that vest 25% in the first year, 25% in second year, and 50% the third years. For accounting purposes we have three separate awards.

Plans With Graded-Vesting Illustration 19-3 (Page 1078) Graded vesting

U.S. GAAP vs. IFRS There are more similarities than differences in the treatment of stock options. One major difference is the treatment of deferred tax assets and when options have graded-vesting. Account for each vesting amount separately or account for the entire award on the straight-line basis over the entire vesting period. Straight-line choice is not permitted. Companies not required to recognize the award that has vested by each reporting date. Part I There are more similarities than in the treatment of stock options. One major difference is the treatment of deferred tax assets and when options have graded-vesting. Part II From the viewpoint of the FASB; A deferred tax asset (DTA) is created for the cumulative amount of the fair value of the options the company has recorded for compensation expense. Account for each vesting amount separately or account for the entire award on the straight-line basis over the entire vesting period. From the viewpoint of the IFRS; The deferred tax asset is not created until the award is “in the money;” that is it has intrinsic value. Straight-line choice is not permitted. Companies not required to recognize the award that has vested by each reporting date.

Employee Share Purchase Plans  Permit employees to buy shares directly from their employer.  Usually the plan is considered compensatory, and compensation expense is recorded.  Employees may buy 100 shares of no par stock for $8.50 per share. The current market price is $10.00. The $1.50 discount is recorded as compensation expense: An employee stock purchase plan permits employees to buy shares of the company’s common stock directly from the company. There is usually an element of compensation measured by the difference between the value fair of the stock purchased and the discounted purchased price that employees may receive. To record the compensation associated with this share purchase plan, we would debit Cash for the total amount received, $850, debit Compensation Expense for $150 (100 shares times the discount of $1.50 per share), and credit Common Stock for $1,000 (100 shares times the current market price of $10 per share). Cash (100 × $8.50) 850 Compensation expense (100 × $1.50) 150 Common stock (100 × $10.00) 1,000 Market value Exercise 19-9

Tax Implications  For tax purposes, plans can either qualify as an “incentive stock option plan” (qualified) under the Tax Code or be "unqualified plans."  Among the requirements of a qualified option plan is that the exercise price be equal to the market price at the grant date. Under a qualified incentive plan: -The recipient pays no income tax until any shares acquired are subsequently sold. -On the other hand, the company gets no tax deduction at all. With a non-qualified plan: -the employee can’t delay paying income tax, and -the employer is permitted to deduct the difference between the exercise price and the market price at the exercise date. Example: Page 190: Additional Consideration: Tax Consequences….

U.S. GAAP vs. IFRS There are more similarities than differences in the treatment of stock options. One major difference is the treatment of deferred tax assets and when options have graded-vesting. A deferred tax asset (DTA) is created for the cumulative amount of the fair value of the options the company has recorded for compensation expense. The deferred tax asset is not created until the award is “in the money;” that is it has intrinsic value. Part I There are more similarities than in the treatment of stock options. One major difference is the treatment of deferred tax assets and when options have graded-vesting. Part II From the viewpoint of the FASB; A deferred tax asset (DTA) is created for the cumulative amount of the fair value of the options the company has recorded for compensation expense. Account for each vesting amount separately or account for the entire award on the straight-line basis over the entire vesting period. From the viewpoint of the IFRS; The deferred tax asset is not created until the award is “in the money;” that is it has intrinsic value. Straight-line choice is not permitted. Companies not required to recognize the award that has vested by each reporting date.

Home Work Problem 19-1 Problem 19-2 Problem 19-3

Part B: Earnings Per Share I. For analysts and the financial press, earnings per share is the most frequently cited and reported measure of a company’s performance. A. EPS is reported in the income statement of all publicly traded firms. B. In general, EPS is simply earnings available to common shareholders divided by the weighted average number of common shares outstanding. II. If a company has no “potential common shares” we consider it to have a simple capital structure. A. For a simple capital structure, a single presentation of basic EPS is sufficient. B. If there are no securities other than common stock and the number of common shares remained unchanged, basic EPS is simply net income divided by common shares.

EARNINGS AVAILABLE TO COMMON SHAREHOLDERS Preferred dividends are subtracted from net income so that “earnings available to common shareholders” is divided by the weighted average number of common shares. EXAMPLE: Sovran Financial Corporation reported net income of $154 million in 2011 (tax rate 40%). Its capital structure included: Common stock January 1 60 million common shares were outstanding March 1 12 million new shares were sold June 17 A 10% stock dividend was distributed October 1 8 million shares were reacquired as treasury stock Preferred stock, nonconvertible January 1 5 million 8%, $10 par, shares outstanding

EARNINGS AVAILABLE TO COMMON SHAREHOLDERS Basic EPS: (amounts in millions, except per share amount) net preferred income dividends $154 – $4 * = $150 = $2 60(1.10) + 12 (10/12)(1.10) – 8 (3/12) = 75 Shares new treasury at Jan. 1 shares shares _____stock dividend_______ adjustment 5,000,000 x $10 x 8% = $4 EXERCISE 19-14

Diluted Earnings Per Share When a company has securities that could potentially Dilute (i.e., reduce) earnings per share, it is classified as a complex capital structure. These potential common shares include stock options And Convertible securities. The company reports both basic and diluted earnings per share. For diluted EPS, the impact of each potentially dilutive security is reflected by calculating earnings per share as if the security already had been exercised or converted into additional common shares.

Diluted Earnings Per Share Complex Capital Structure (dual EPS) Potential Common Shares: Stock options, rights, and warrants Convertible bonds and stock Contingent common stock issues Stock Options Convertible securities Contingently issuable shares Treasury stock method If-converted method To this point, we have discussed the calculation of basic earnings per share. Now, we will begin our discussion of diluted earnings per share. We will only report diluted earnings per share if the company is determined to have a complex capital structure. A company is said to have a complex capital structure, if, in addition to common stock, it has convertible securities (debt or preferred), or stock options, rights, or warrants. In the next several slides, we will look at the calculation of diluted earnings per share in detail. Imagine a situation in which convertible bonds are outstanding that will significantly increase the number of common shares if bondholders exercise their options to exchange their bonds for shares of common stock. Should these be ignored when earnings per share is calculated. After all, they haven’t been converted as yet, so to assume an increase in shares for a conversion that may never occur might mislead investors and creditors. On the other hand, if conversion is imminent, not taking into account the dilutive effect of the share increase might mislead investors and creditors. The profession’s solution to the dilemma is to calculate earnings per share twice – Basic and Diluted Earnings per Share. Dilution/Antidilution Test May Report Basic EPS and Diluted EPS

Options, Rights, and Warrants The treasury stock method assumes that proceeds from the exercise of options are used to purchase treasury shares. This method usually results in a net increase in shares included in the denominator of the calculation of diluted earnings per share. Proceeds At average market price Used to Stock options, stock rights, and stock warrants are similar. Each gives its holders the right to exercise their option to purchase common stock, usually at a specified exercise price. The dilution that would result from their exercise should be reflected in the calculation of diluted EPS, but not basic EPS. Whenever a company has options, rights, or warrants we use the treasury stock method to determine the impact of those securities on diluted earnings per share. Under the treasury stock method we assume that any proceeds received from the exercise of the option, right, or warrant is used to purchase treasury shares at the average market price per share. The effective of this treatment is to determine an incremental number of shares that will appear in the denominator of the diluted earnings per share equation. Purchase treasury shares

Options, Rights, and Warrants Determine new shares from assumed exercise of stock options 2. Compute shares purchased from the treasury. 3. Compute the incremental shares assumed outstanding: Proceeds from assumed exercise Average-of-period market price of stock New shares from assumed exercise (1) Less: Treasury shares assumed purchased (2) = Net increase in shares outstanding (3) The incremental shares will be the difference between the new shares assumed issued minus the treasury shares assumed to be repurchased with the proceeds. In our diluted EPS calculation, we assume the options are exercised at the end of the period or at the time of actual exercise, if earlier, with shares repurchased at the average share price on that date. For certain options, we must consider the total compensation from the award that has not yet been expensed. If the fair value of an option had been $4 at the date of grant, and options for 1,000 shares were issued, total compensation would be $4,000. The total compensation will have a tax impact on the issuing company. The difference between the market price of the stock is greater than the exercise price, we will consider the “excess tax benefit” associated with the option. Illustration 19-9 (Page 202): Stock Options Exercise 19-15 & 19-16

Options, Rights, and Warrants When the exercise price exceeds the market price, the securities are antidilutive and are excluded from the calculation of diluted EPS. If the exercise price of the option, right, or warrant is higher than the market price, the securities are said to be antidilutive, and are excluded from the calculation of diluted earnings per share.

Convertible Securities The if-converted method is used for Convertible debt and equity securities. The method assumes conversion occurs as of the beginning of the period or date of issuance, if later. Sometimes corporations include a conversion feature as part of a bond offering, a note payable, or an issue of preferred stock. Convertible securities can be converted into shares of stock at the option of the holder of the security. For that reason, convertible securities are potentially dilutive. EPS will be affected if and when such securities are converted and new shares of common stock are issued. When a company has convertible securities and is calculating earnings per share, it uses the “if converted” method to determine the impact of those securities upon earnings per share. The “if converted” method assumes the conversion into common stock occurred at the beginning of the period (or at the time the convertible security is issued, if that is later). If the convertible shares have been outstanding in prior years, we will assume conversion as of the beginning of the current period.

Restricted Stock Awards Restricted stock awards are quickly replacing stock options as the share-based compensation plan of choice. Like stock options, the treasury stock method is used to calculate the number of shares in the denominator of the EPS equation. Unlike stock option, employees do not pay to acquire their shares of stock. Restricted stock awards are quickly replacing stock options as the share-based compensation plan of choice. Like stock options, they represent potential common shares and their dilutive effect is included in diluted EPS using the treasury method. Generally, employees do not pay anything to acquire the shares of stock. Only unvested shares are included in the EPS calculation. No adjustment to the numerator Denominator is increased using treasury method

Summary Here is a short summary of the treatment of stock options, convertible securities, and contingently issuable shares on basic and diluted earnings per share.

Summary This is a more detailed summary of the impact of the options, convertible bonds, convertible preferred and contingently issuable shares on the numerator and denominator of the earnings per share equation.

Financial Statement Presentation Report EPS data separately for: Income from Continuing Operations Separately Reported Items Discontinued Operations Extraordinary Items Net Income Companies must disclose per share amounts for (1) income before any separately reported items, (2) each separately reported item, and (3) net income.

Appendix 19A – Option-Pricing Theory Intrinsic value is the benefit the holder of an option would realize by exercising the option rather than buying the underlying stock directly. An option that permits an employee to buy $25 stock for $10, has an intrinsic value of $15. Options have a time value because the holder of an option does not have to pay the exercise price until the option is exercised. Intrinsic value is the benefit a holder of an option would realize by exercising the option rather than buying the underlying stock directly. An option that permits an employee to buy $25 stock for $10, has an intrinsic value of $15. Options have a time value because the holder of the option does not have to pay the exercise price until the option is exercised.

Summary The fair value of an option is (a) its intrinsic value plus (b) its time value of money plus (c) its volatility component. The fair value of an option is its intrinsic value, plus it’s time value of money, plus its volatility component. This table shows the impact of various option pricing factors on the value of the option itself.

Appendix 19B - Stock Appreciation Rights A. SARs enable an executive to benefit by the amount that the market price of the company’s stock rises, but without having to buy shares. B. The executive receives the “share appreciation” at exercise that has occurred since the date of grant. C. Share appreciation is the increase in the market price over a pre-specified price (usually the market price at the date of grant). Stock appreciation rights, or SARs, are consider equity if the employer can elect to settle the rights in shares of the company’s stock. The amount of compensation expense is estimated at the date of grant as the fair market value of the SARs. The estimated amount is expensed over the service period.

Appendix 19B - Stock Appreciation Rights  The SARs are considered to be equity if the employer can elect to settle in shares of stock.  The amount of compensation is estimated at the grant date as the fair value of the SARs.  This amount is expensed over the service period. Usually the same as the fair value of a stock option with similar terms. Stock appreciation rights, or SARs, are consider equity if the employer can elect to settle the rights in shares of the company’s stock. The amount of compensation expense is estimated at the date of grant as the fair market value of the SARs. The estimated amount is expensed over the service period.

Stock Appreciation Rights  The SARs are considered to be a liability if the employee can elect to receive cash upon settlement. In that case, the amount of compensation (and related liability) is estimated each period and continuously adjusted to reflect changes in the fair value of the SARs until the compensation is finally paid.  The current expense (and adjustment to the liability) is the fraction of the total compensation earned to date by recipients of the SARs (based on the elapsed percentage of the service period), reduced by any amounts expensed in prior periods. In some cases, the employee may elect to receive cash upon settlement of the SARs plan. In this case the SARs represent a liability. The amount of compensation expense is estimated each accounting period and continuously updated to reflect changes in the fair vale of the SARs. The current compensation expense is a fraction of the total compensation earned to date by the recipients of the SARs reduced by the amounts expensed in pervious periods.

End of Chapter 19 End of Chapter 19.