1. Gabriela H. Schneider, CMA Northern Alberta Institute of Technology
INTERMEDIATE ACCOUNTING Seventh Canadian Edition KIESO, WEYGANDT, WARFIELD, YOUNG, WIECEK
Prepared by:
Gabriela H. Schneider, CMA Northern Alberta Institute of Technology 2

2. Stock Compensation Plans—Additional Complications
Appendix 17B
Stock Compensation Plans—Additional Complications

3. Learning Objectives Account for stock appreciation rights plans
Explain the nature of performance related plans

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

5. Stock Appreciation Rights (SARs)
SARs 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

6. 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

7. SARs – Final Notes
Compensation expense adjusted whenever stock price changes
Change is reported in subsequent periods, or when exercised, whichever comes first
Cumulative compensation expense can never have a negative value

8. Stock Appreciation Rights (SARs) - Example
Given:
SAR program established: January 1, 2004
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, 04: $ 13; Dec 31, 05: $17; Dec 31, 06: $ 15
Service period: 2 years ( )
The SARs are held for 3 years, then exercised
Determine the compensation expense for 2004, 2005, and 2006

9. Stock Appreciation Rights (SARs) - Example
Date Cumulative Percentage Comp. Expense
Dec 31st Compensation Accrued based on Recognized for
Recognizable Service Period the current year
,000 * ($13-$10) % $30,000 / 2
= $ 30, = $15,000
,000 * ($17-$10) % $ 70,000 - $15,000
= $ 70, = $55,000
,000 * ($15-$10) % * $ 50,000 - $70,000
= $ 50, = ($20,000)
*Exercise date occurs before rights expiry date,
final adjustment required in 2006
Journal Entries

10. Stock Appreciation Rights (SARs) - Entries
Debit
Credit
Dec 31, 2004 Compensation Expense ,000
Liability under SARs 15,000
Dec 31, 2005 Compensation Expense ,000
Liability under SARs 55,000
Dec 31, 2006 Liability under SARs ,000
Compensation Expense 20,000
Dec 31, 2006 Liability under SARs ,000
Cash 50,000
(SARs exercised end of the third year)

11. Stock Appreciation Rights (SARs) - Example
Market Price
Compensation
Expense
12/31/04
12/31/05
12/31/06 $
The recorded cost of
compensation is
directly linked to the
market performance
of the stock, not
executive performance

12. 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

13. COPYRIGHT
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