1. Prepared by Gabriela H. Schneider, CMA; Grant MacEwan College INTERMEDIATE ACCOUNTING INTERMEDIATE ACCOUNTING Sixth Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK

2. C H A P T E R 18 Dilutive Securities and Earnings per Share

3. Appendix 18A Stock Compensation Plans - Additional Complications

4. Study Objectives 1.Discuss the reporting issues surrounding other compensation plans

5. Compensation Expense Two common plans with unique accounting issues 1.Stock appreciation rights plans Affords the right to receive compensation equal to share appreciation 2.Performance-type plans Where compensation not based on share appreciation Criteria normally based on corporate performance

6. Stock Appreciation Rights [SARs] SARs are designed to mitigate employee’s cash flow problems in non-qualified plans Employee receives any appreciation in share value Appreciation =Market price at exercise date less a pre-established price Appreciation paid out in cash, shares, or combination Accounted for using either Fair value method Intrinsic value method

7. Stock Appreciation Rights [SARs] Fair Value Method If compensation paid in shares Value measured at grant date applying option pricing model over the service period If compensation paid in cash Liability created  re-measured each period Re-measurement based on best estimate

8. Stock Appreciation Rights [SARs] Intrinsic Value Method Measurement issue whether paid in cash or shares Share value changes over service period Re-measurement required for each period FV Shares – Option, Exercise = Compensation or Stated Price Cost Variable Fixed

9. Stock Appreciation Rights (SARs) How is compensation expense measured from date of grant to date of exercise? Percentage approach applied Cost = (current market price - option price) times number of stock appreciation rights outstanding Cost allocated over the service period Problem occurs when exercise date goes beyond service period

10. Stock Appreciation Rights (SARs) - Example Given: SAR program established: January 1, 2001 SAR exercise period: any time during next five years Pre-established price per SAR: $10 Number of SARs granted: 10,000 Market prices of the stock: Dec 31, 01: $ 13; Dec 31, 02: $17; Dec 31, 03: $ 15 Service period: 2 years (2001 - 2002) The SARs are held for 3 years, then exercised Determine the compensation expense for 2001, 2002, and 2003

11. Stock Appreciation Rights (SARs) - Example Date Cumulative Percentage Comp. Expense Dec 31 st Compensation Accrued based on Recognized for Recognizable Service Period the current year 2001 10,000 * ($13-$10) 50% $30,000 / 2 = $ 30,000 = $15,000 2002 10,000 * ($17-$10) 100% $ 70,000 - $15,000 = $ 70,000 = $55,000 2003 10,000 * ($15-$10) 100% * $ 50,000 - $70,000 = $ 50,000 = ($20,000) *Exercise date occurs before rights expiry date, final adjustment required in 2003 Journal Entries

12. Stock Appreciation Rights (SARs) - Entries DebitCredit Dec 31, 2001Compensation Expense 15,000 Liability under SARs15,000 Dec 31, 2002Compensation Expense 55,000 Liability under SARs55,000 Dec 31, 2003Liability under SARs 20,000 Compensation Expense20,000 Dec 31, 2003Liability under SARs 50,000 Cash50,000 (SARs exercised end of the third year)

13. Stock Appreciation Rights (SARs) - Example The recorded cost of compensation is directly linked to the market performance of the stock, not executive performance Market Price Compensation Expense 12/31/0112/31/0212/31/03 $

14. Performance-Type Plans Designed to separate market behavior from executive performance measurement Examples of performance measurement criteria might include: ROA or ROE EPS growth Measurement date is the date of exercise Compensation cost allocated to periods involved using the percentage approach

15. Summary of Compensation Plans TypeMeasurement Measurement Allocation Allocation of Plan Date of Compensation Period Method Compensatory Stock Option Intrinsic GrantMarket price lessN/AN/A Valueexercise price Fair GrantOption pricing Service Straight-line Valuemodel Stock Appreciation Rights Intrinsic ExerciseMarket price less Service Percentage, Valueexercise price mark to mkt. Fair GrantOption pricing Service Straight-line Valuemodel mark to mkt. Performance-type Plan Intrinsic ExerciseMarket value of Service Percentage, Valueshares issued mark to mkt. Fair ExerciseMarket value of Service Percentage, Valueshares issued mark to mkt.

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