share based compensation and earnings per share
Download
Skip this Video
Download Presentation
Share-Based Compensation and Earnings Per Share

Loading in 2 Seconds...

play fullscreen
1 / 37

Share-Based Compensation and Earnings Per Share - PowerPoint PPT Presentation


  • 493 Views
  • Uploaded on

Share-Based Compensation and Earnings Per Share. Sid Glandon, DBA, CPA Associate Professor of Accounting The University of Texas at El Paso. Stock Compensation Plans. Provide employee incentives: Stock award plans Stock option plans Stock appreciation rights

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Share-Based Compensation and Earnings Per Share' - andrew


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
share based compensation and earnings per share

Share-Based Compensation and Earnings Per Share

Sid Glandon, DBA, CPA

Associate Professor of Accounting

The University of Texas at El Paso

stock compensation plans
Stock Compensation Plans
  • Provide employee incentives:
    • Stock award plans
    • Stock option plans
    • Stock appreciation rights
    • Broad-based (noncompensatory plans)
stock award plans
Stock Award Plans
  • Restricted shares are issued as compensation
  • Compensation expense is recognized over the vesting period
  • At the end of the vesting period the normal equity accounts are credited for common stock and additional paid-in capital
stock option plans
Stock Option Plans
  • Important dates
    • Grant date of options
    • Vesting date
    • Exercise date of options
  • Compensation expense recognized by
    • Fair value method (SFAS 123)
example fact pattern
Example: Fact Pattern
  • Grant date, January 1, 2001
  • 10,000 options granted
  • One option = one $1 par value share
  • Exercise price: $60; Market price: $70
  • Options exercisable within 10 years
  • Service period is 2 years
  • 2,000 options exercised on June 1, 2004
  • 8,000 options expired on January 1, 2011
  • Using an option pricing model the fair value of options is $220,000
stock appreciation rights sars
Stock Appreciation Rights SARs
  • SARs are designed to mitigate employee cash flow problems in non-qualified plans
  • Employee gets right to receive any appreciation in share value at exercise date equal to market price
    • Less pre-established amount
  • Employee receives cash or stock only for the appreciation
example stock appreciation rights
Example: Stock Appreciation Rights
  • Fact Pattern:
    • SARs program established, January 1, 2001
    • Exercise period, over next five years
      • Pre-established price per SAR $10
      • Number of SARs granted, 10,000
    • Market prices of stock at December 31,
      • 2001, $13
      • 2002, $17
      • 2003, $15
    • Service period: 2 years
    • The SARs are exercised on December 31, 2003
earnings per share eps
Earnings Per Share (EPS)
  • Most important number in income statement
  • Dilution of EPS means reduction in EPS
  • Potential conversion of dilutive securities into common stock
  • If dilution takes place extent of reduction must be disclosed
basic eps1
Basic EPS
  • Fact Pattern:
    • Beginning balance = 800,000 shares
    • Issued 100,000 shares on April 1
    • Reacquired 300,000 shares on July 1
    • Net income = $1,700,000
    • Preferred dividends = $250,000
stock dividends and splits
Stock Dividends and Splits
  • Restatement of weighted shares outstanding before the dividend or split
  • Deemed to have been outstanding since the beginning of the year
  • After year end but before issuance of financial statements require restatement to beginning of year
basic eps with stock dividends
Basic EPS with Stock Dividends
  • Fact Pattern:
    • Beginning balance = 800,000 shares
    • Issued 100,000 shares on April 1
    • Reacquired 300,000 shares on July 1
    • 25% stock dividend on October 1
    • Issue 120,000 shares on November 1
    • Net income = $1,500,000
    • Preferred dividends = $481,125
complex capital structures
Complex Capital Structures
  • Stock options, rights and warrants
  • Convertible securities
    • Convertible bonds
    • Convertible preferred stock
  • Only dilutive securities are considered
  • Antidilutive securities are ignored
dilution
Dilution
  • Reduction in EPS if potentially dilutive:
    • Stock options, rights or warrants
    • Convertible securities
  • Assumed exercised or converted at beginning of the year
  • Two EPS calculations
    • Basic EPS, and
    • Diluted EPS
methods
Methods
  • Treasury stock method
    • Options, Rights and Warrants
  • If converted method
    • Convertible Securities
  • Maximum dilutive conversion rate is used in calculating diluted EPS
treasury stock method
Treasury Stock Method
  • Options, rights and warrants are included in EPS computations
  • Assumed exercised at beginning of year
  • Proceeds from exercise are assumed used to buy back common shares
  • Exercise price per share must be less than market price per share for dilution
treasury stock method1
Treasury Stock Method
  • Fact Pattern:
    • Exercise price = $10 per share
    • Average market price = $40 per share
    • 1,000 options outstanding and assumed exercised
    • Additional shares added to weighted-average common shares outstanding
if converted method
If-Converted Method
  • Conversion of securities into common stock is assumed to occur at the beginning of the year
  • Related interest effect (net of tax) and/or convertible preferred dividends are removed from the calculation of income available to common shares
  • Weighted average number of shares is increased by additional common shares assumed issued at beginning of year
if converted method1
If-Converted Method
  • Fact Pattern:
    • Net income = $500,000
    • Common shares outstanding = 250,000
    • $1,000,000 6% convertible bonds
    • Each $1,000 bond convertible into 25 shares of common stock
    • Income tax rate = 35%
complex capital structures1
Complex Capital Structures
  • Requires duel presentation
    • Basic earnings per share
    • Diluted earnings per share
ad