Question 19–20
The accounting treatment of SARs depends on whether the award is considered
an equity instrument or a liability. If the employer can choose to settle in shares
rather than cash, the award is considered to be equity. If the employee will receive
We use fundamentally the same accounting for restricted stock units (RSUs)
payable in cash. RSUs give the recipient the right to receive a set number of shares
of company stock after the vesting requirement is satisfied, or sometimes the
Brief Exercise 19–1
BRIEF EXERCISES
Brief Exercise 19–2
Brief Exercise 19–3
The $60 million total compensation is expensed equally over the three-year
vesting period, reducing earnings by $20 million each year.
Brief Exercise 19–4
The company should adjust the cumulative amount of compensation
expense recorded to date in the year the estimate changes.
2019
2020
Note that this approach is contrary to the usual way companies account for changes
in estimates. For instance, assume a company acquires a three-year depreciable
Brief Exercise 19–5
At January 1, 2018, the estimated value of the award is:
($ in
millions)
We adjust the cumulative amount of compensation expense recorded to date in
the year a forfeiture occurs.
December 31, 2019
Not required:
December 31, 2020
As a practical expedient, companies can elect to account for forfeitures of
stock options or restricted stock when they occur rather than estimating them. So
2 years of the 3-year
vesting period have
passed
Brief Exercise 19–6
($ in millions)
Cash ($17 exercise price x 12 million shares)………………….. 204
Brief Exercise 19–7
Brief Exercise 19–8
The estimate of the total compensation would be:
options fair estimated
expected value total
to vest per option compensation
One-third of that amount, or $200,000, will be recorded in each of the three years.
Brief Exercise 19–9
The new estimate of the total compensation would change to:
options fair estimated
expected value total
to vest per option compensation
In that case, in 2019, Farmer would reverse the $200,000 expensed in 2018
Brief Exercise 19–10
In that case, in 2019, the revised estimate of the total compensation would change
to $600,000:
options fair estimated
expected value total
to vest compensation
Farmer would reflect the cumulative effect on compensation in 2019 earnings and
record compensation thereafter:
2019
2020
Brief Exercise 19–11
If an award contains a market condition such as the stock price reaching a specified
level, then no special accounting is required. The fair value estimate of the share
option ($6) already implicitly reflects market conditions due to the nature of share
option pricing models. So, Farmer recognizes compensation expense regardless of
when, if ever, the market condition is met. The estimate of the total compensation
would be:
options fair estimated
expected value total
to vest per option compensation
One-third of that amount, or $200,000, will be recorded in each of the three years.
(amounts in millions, except per share amount)
net Earnings
income Per Share
shares new shares
at Jan. 1 shares retired
Brief Exercise 19–12
(amounts in millions, except per share amount)
net preferre
d
income
dividends Earnings
common
shares
Since the preferred stock is cumulative, the dividends (8% x $200 million =
$16 million) are deducted even though no dividends were declared. There are no
potential common shares, so a single calculation of EPS is appropriate.
*Purchase of treasury shares
Brief Exercise 19–13
Brief Exercise 19–14
(amounts in thousands, except per share amounts)
Basic EPS
net preferred
income dividends
shares
at Jan. 1
Diluted EPS
net
income
shares conversion*
at Jan. 1 of preferred
shares
The preferred shares are considered converted when calculating diluted EPS.
If converted, there would be no preferred dividends.
The total compensation for the award is $45 million
($5 market price per share x 9 million shares). Because the stock award vests over
Brief Exercise 19–15
Brief Exercise 19–16
*Assumed purchase of treasury shares
EXERCISES
Exercise 19–1
Requirement 1
Requirement 2
December 31, 2018 ($ in millions)
December 31, 2019