Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
C15-4. Salesforce.com: Interpreting Share-based Compensation
Disclosures (LO 15-7, LO 15-8)
All answers involving financial statement amounts are in
thousands.
Requirement 1: 2015 share-based compensation expense and
classification
The total amount of share-based compensation expense is $564,765. It
The entry would have been:
DR Various compensation expense accounts $564,765
Marketing and sales, and General and administrative expenses
Requirement 2: Net loss versus cash from operations
There are a number of large non-cash expenses, Depreciation and
Requirement 3: Cost of options granted versus 2015 share-based
compensation expense
Total compensation cost of options granted expense is $163,510.286
granted in 2015 of 9,506.412 from Note 7.
Note 1 says that awards generally vest over 4 years. Therefore, the above
requirement 1 above.
Requirement 4: Verify fair value of options granted in 2015
Most of the assumptions come from Note 1 (Accounting for Stock-Based
Expense):
15-1
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Dividends = zero.
The exercise price and stock price come from Note 7, for options granted
during 2015:
Using the CBOE calculator at www.cboe.com, one enters the above
values.
The $16.90 value approximates the salesforce.com of $17.20, though we had
value of an option.
Requirement 5: Effect of assumption change
The change increased the fair value of the option. The longer time period
expected stock price and the present value of the exercise price.
Requirement 6: Aggregate intrinsic value and interpretation
Note that salesforce.com’s intrinsic value table is presented in actual dollars
$34.37) equals $248,470.259, which is very close to the reported amount of
$248,524.393.
Outstanding represents all options, whereas exercisable means that the
options have vested. Unvested options cannot be exercised.
$379,380.854 from the note divided by market value of $36,726,144 ($56.45
15-2
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Requirement 7: Tax benefits
Excess tax benefits of $7,730 are shown as an increase to the financing
Requirement 8: Effect of ASU 2016-09
Income tax expense will be lower. The $7,730 in excess tax benefits from
though it has a GAAP loss. Normally, we would expect an income tax benefit
that is subtracted from the GAAP loss.
Subtracting $7,730 from income tax expense of $49,603 yields a new income
Requirement 9: EPS effect
Salesforce.com has a Net loss of $(262,688). If the denominator for EPS is
Recall from questions 1 and 2 that share-based compensation expense was
$104,409, computed as -$262,688 + [share-based expense of 564,765 x (1
minus the tax rate of .65)].
C15-5. Classifying as equity or debt (LO LO 15-1, 15-3, LO 15-9)
Requirement 1:
The cash flows associated with the January 1, 1997 issuance of junior
debentures and “capital securities” (preferred stock) are as follows:
15-3
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
The end result is that investors own preferred stock and Aon Corp has
the cash. Aon Capital has no assets other than the junior debentures
from Aon Corp.
Requirement 2:
The interest and dividend payment cash flows are as follows:
Requirement 3:
For financial reporting purposes, Aon Capital will be consolidated with
Similarly, interest “income” (at Aon Capital) will be cancelled against
Requirement 4:
There are two related reasons why Aon Corp. created Aon Capital as
a vehicle for raising $800 million cash. One explanation is that doing
tax advantage).
A second reason to create Aon Capital is to keep the “debt” off of the
books of Aon Corp. Although the transaction has the legal form of a
to say so.
Requirement 5:
Aon’s financial statements pre-date current GAAP (pre-Codification
15-4
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
GAAP (and SEC rules) prevailing at the time and shows the
redeemable preferred in the “mezzanine” section.
Requirement 6:
The following schedule shows the calculation of Aon’s debt-to-equity
ratio with and without the preferred capital securities being considered
as debt:
As reported Preferred as debt
2002
2001
2002
2001
Short-term borrowings
$117
$257
$117
$257
Notes payable $1,671 $1,694 $1,671 $1,694
Preferred capital securities as debt $702 $800
Total debt
$1,788
$1,951
$2,490
$2,751
Redeemable preferred stock $50 $50 $50 $50
Preferred capital securities as equity $702 $800
Common stockholders equity $3,895 $3,465 $3,895 $3,465
Total equity
$4,647
$4,315
$3,945
$3,515
Long-term debt to equity
0.38
0.45
0.63
0.78
true financial condition.
Part B: Cephalon Inc.’s Zero-Coupon, Zero Yield-to-Maturity
Convertible Notes
Requirement 1:
The following entry was made when the convertible notes were
issued:
U.S. GAAP does not yet require firms to separately value the
company’s books.
15-5
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Because the note does not require any cash interest or principal
Requirement 2:
Investors paid $233.854 million (rounded) for the note and another
paid $516.146 million (or $750.000 - $233.854) for the conversion
option.
Requirement 3:
The following entry would be made when the notes are issued on
June 11, 2003:
The stock options account would appear on the balance sheet as part
of stockholders’ equity.
At the end of the year, Cephalon would record interest expense on the
only 204 days out of a 365-day year. Interest expense would then
total only $7.842 million (or $14.031 x 204 / 365) and the company
No other entries are required.
Requirement 4:
Current GAAP follows the accounting described in Requirement 1,
restrictions are no longer in force, Cephalon will include the Notes in
the computation of diluted EPS using the “if converted” method
described in the text.
Requirement 5:
As the book goes to press, the FASB is still deliberating changes to
debt and option components of the note as shown in Requirement 3.
Part C: Avenet’s Cash Settled Convertible Debt
Requirement 1:
The following entry was made when the convertible debentures were
originally issued:
component of the convertible debenture. Interest expense would be
recorded at 2% per year, or $6 million ($300 million x 2%) annually.
Requirement 2:
Under current GAAP, the following entry would have been made when
Interest expense would be recorded at 7% per year, based on the
maturity (see Chapter 11).
Requirement 3:
IFRS rules also require separation of the embedded conversion option
15-7
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Requirement 4:
Management may have decided to extinguish the 2% convertible debt
so that it could take advantage of a more favorable interest rate
expense that would have been reported under the new GAAP
guidelines.
15-8
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
