Chapter 19 NEW - Share-Based Compensation and Earnings Per...

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Accounting 124/EPS 1 Share-Based Compensation and Earnings Per Share Chapter 19 Prepared by: Prof. Elizabeth K. Venuti
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Accounting 124/EPS 2 Dilutive securities Securities that are Not common stock, but Enable their holders to obtain common stock upon  exercise or conversion. Termed ‘dilutive’ because of the effect that they  could have on EPS. Examples: Convertible bonds, convertible  shares
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Accounting 124/EPS 3 Stock warrants Entitle holder to: Acquire shares of stock, At a set price, Within a specified time period. Issued as: An ‘equity kicker’ to make another security more  attractive (e.g., bonds with detachable warrants). A pre-emptive right to purchase additional shares to  existing shareholders. Compensation to executives and employees (stock  options).
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Accounting 124/EPS 4 Stock compensation plans Selected employees given: Option to purchase common stock in the  company At a given price Over a specified period of time. Accounting issues: The value of the compensation expense. The benefit period.
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Accounting 124/EPS 5 Measuring stock compensation expense Intrinsic value method no longer allowed as a  result of FAS No. 123R. Under this method, expense was equal to (MP –  OP) x # options granted; where, MP = market price on grant date OP = option (exercise) price To avoid recording any expense, companies  waited until the grant date and then set the  option price equal to the market price on the  grant date.
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Accounting 124/EPS 6 Measuring stock compensation expense Fair value method: FV/option x Options Expected to Vest = Expense FV = fair value of options as of the grant date;  determined externally (option pricing model). Compensation expense is accrued over the service  period for which participants receive the options,  usually from the date of grant to when the options  become exercisable (the vesting date).  Now mandated by FAS No. 123R.
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Accounting 124/EPS 7 Accounting for Stock Options Issuance, Exercise, and Termination of Stock Options On January 1, 2008, Nichols Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share of Nichols’ $5 par value common stock at a price of $20 per share. The options were exercisable within a 2-year period beginning
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This note was uploaded on 04/10/2008 for the course ACT 124 taught by Professor Venuti during the Fall '07 term at Hofstra University.

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Chapter 19 NEW - Share-Based Compensation and Earnings Per...

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