Continuing with our aon example the company reports a

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Continuing with our Aon example, the company reports a deferred tax asset to recog the future tax deduction of the compensation payment. Specifically, Aon reports a deferred benefit of $87,500 ($250,000 X 0.35) in each of the four years of the vesting period to refl the expected reduction in future tax liability when the options are exercised. Thus, the after stock option compensation expense is $162,500 (computed as $250,000 - $87,500). Each y Aon increases the deferred tax asset account (on the balance sheet) by $87,500. The bal grows until the fourth year when the deferred tax asset balance is $350,000. When the employ exercises the options and Aon realizes the tax benefits, the company reduces taxes pa and reverses the deferred tax asset previously set up.' The financial statement effects templ would record these transactions as follows in each of the four years of the vesting period. = Balance Sheet Income Statement "-.. Net .Income Cash Asset Liabil- + Contrib. + Earned ities Capital Capital + Noncash Assets Rev- enues Expen- ses Transaction Years 1,2,3,4: Grant 100,000 stock options with fair value of $10 per share, vesting over 4 years -162,500 Retained Earnings +250,000 Wages -162,- Expense = Nel -87,500 InCOOE Tax Expense +87,500 Deferred Tax Asset = +250,000 Additional Paid-In Capital At exercise: 100,000 stock [email protected] exer- cised at a $26 exercise price +2,600,000 Cash = +2,600,000 Additional Paid-In Capital At exercise: Tax effect of the exercised stock options ................................................. ~ . -350,000 Deferred Tax Asset = -350,000 Taxes Payable --------_e------------------------------------ Aon's following footnote discloses many details of its stock option activities. Aon reports 143,000 options were granted in 2010 with an average strike price of $38.00 These options I The tax benefit the company receives is based on the options' intrinsic value (current stock price less strike pri - the exercise date. Often, the exercise-date intrinsic value is greater than the grant-date fair value. Recall that de taxes are recorded based on grant-date fair value. Thus, the tax benefit received is often larger than the deferred tax on the company's balance sheet. In that case, any tax benefit in excess of the deferred tax asset is included in additi paid-in capital and not in net income. The excess tax benefit is classified as cash from financing activities on the ment of cash flows.
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Module 8 I Equity Recognition and Owner Financing 8-12 value of $10.37 per share. The company also reports how many of its options outstanding already vested and could potentially be exercised. (Recall that outstanding options affect the any's diluted EPS calculation, see Module S.) Stock Compensation Costs The Company recognizes compensation expense for all share- based payments to employees, including grants of employee stock options and restricted stock and restricted stock units (URSUs"),as well as employee stock purchases related to the Employee Stock ?urchase Plan, based on estimated fair value. Stock-based compensation expense recognized dur- ing the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period, based on the achievement of service or performance conditions.
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