Stock Compensation Plans, Pesions, Derivatives, FX, Segment Reporting

Stock Compensation Plans, Pesions, Derivatives, FX, Segment Reporting

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Stock Compensation Plans A stock option is a form of warrant that arises in stock compensation plans used to pay and motivate employees. This type of warrant gives selected employees the option to purchase common stock at a given price over an extended period of time. The FASB has recently issued a new standard (SFAS#123) on stock options and other types of compensation plans that are stock listed. In the past, the FASB gave companies, a choice in the method of recognizing the cost of compensation under a stock option plan. The two choices were: a. the fair value method, and b. the intrinsic value method. ******The FASB now requires the use of the fair value method. The Fair Value Method Using the fair value method, total compensation expense is computed based on the fair value of the options expected to vest on the date the options are granted to the employees. Fair value for public companies is to be estimated use an option pricing model, with some adjustments for the unique factors of employee stock options. No adjustments are made after the grant date in response to subsequent changes in the stock price either up or down. Allocating Compensation Expense In general, compensation expense is recognized in the periods in which the employee performs the service the service period. Unless otherwise specified, the service period is the vesting period the time between the grant and the vesting date. To illustrate the accounting for a stock option plan, assume that on September 16, 2006, the stockholders of Jesilow Company approve a plan that grants the company’s three executives options to purchase 4,000 shares each of the company’s $1 par value common stock. The options are granted on January 1, 2007, and may be exercised at any time within the next five years. The option price per share is $30, and the market price of the stock at the date of grant is $40 per share. Using the fair value method, total compensation expense is computed by applying an acceptable fair value option pricing model. We will assume that the fair value option pricing model determines total compensation expense to be $180,000.
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Assuming the expected period of benefit is 3 years (starting with the grant date), the journal entries for each of the next three years are as follows: Compensation Expense 60,000 Paid-in Capital—Stock Options 60,000 If all of the options are exercised on July 1, 2011, the journal entries under both methods are as follows: Cash (12,000 x $30) 360,000 Paid-in Capital—Stock Options 180,000 Common Stock (12,000 x $1) 12,000 Paid-in Capital in Excess of Par 528,000 Debate Over Stock Option Accounting Companies tried to avoid showing stock compensation as an expense, however, due to the pressure to have transparent financial reporting, many companies changed their attitudes and allowed the FASB to require recognition of stock-based expense.
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Segment Reporting: Reporting for Diversified (Conglomerate) Companies With the increase in diversification within business entities, investors are seeking more
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Stock Compensation Plans, Pesions, Derivatives, FX, Segment Reporting

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