Ch16 - CHAPTER 16 DI LUTIVE SECU R ITI ES AN D EAR N I NGS...

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794 CHAPTER 16 DILUTIVE SECURITIES AND EARNINGS PER SHARE LEARNING OBJECTIVES After studying this chapter, you should be able to: Describe the accounting for the issuance, conversion, and retirement of convertible securities. Explain the accounting for convertible preferred stock. Contrast the accounting for stock warrants and for stock warrants issued with other securities. Describe the accounting for stock compensation plans under generally accepted accounting principles. Discuss the controversy involving stock compensation plans. Compute earnings per share in a simple capital structure. Compute earnings per share in a complex capital structure. 7 6 5 4 3 2 1 Some habits die hard. Take stock options—called by some “the crack co- caine of incentives.” Stock options are a form of compensation that gives key employees the choice to purchase stock at a given (usually lower-than- market) price. For many years, U.S. businesses were hooked on these prod- ucts. Why? The combination of a hot stock market and favorable accounting treatment made stock options the incentive of choice. They were compensation with no expense to the companies that granted them, and they were popular with key employees, so companies granted them with abandon. However, the accounting rules that took effect in 2006 required expensing the fair value of stock options. This new treatment has made it easier for companies to kick this habit. As shown in the chart on the left, a review of option use for the companies in the S&P 500 indicates a decline in the use of option-based compensation. Fewer companies are granting stock options, following imple- mentation of stock-option expensing. As a spokesperson at Progress Energy commented, “Once you begin ex- pensing options, the attractiveness significantly drops.” Kicking the Habit 500 400 100 0 Fewer Option-Crazy Firms ’06 471 ’07 ’03 ’04 ’05 Firms not granting options Firms granting options 438 25 68 PDF Watermark Remover DEMO : Purchase from www.PDFWatermarkRemover.com to remove the watermark
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In the 1990s, executives with huge option stockpiles had an almost irresistible incentive to do whatever it took to increase the stock price and cash in their options. By reining in options, many companies are taking the first steps toward curb- ing both out-of-control executive pay and the era of corporate corruption that it spawned. Some of the ways that companies are curb- ing option grants include replacing options with shares of restricted stock. As indicated in the table on the right, which shows the fair value by industry sector of restricted stock and option grants, restricted stock is now the plan of choice. Even if the financial sector is excluded, the value of restricted stock exceeds the value of stock- option grants. And in the information technology area (where in the past, stock options were heavily favored), the fair value of restricted stock plans exceeds that for stock options. Some companies are simply reducing option
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Ch16 - CHAPTER 16 DI LUTIVE SECU R ITI ES AN D EAR N I NGS...

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