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# Stock Compensation Expense

## Key Things To Know

Expense the full value of the option on the grant date over the service period.

Grant Date:
the date the employer grants the options, terms are agreed upon

Vesting Date:
the date the employee earns the options and the right to exercise

Service Period (Vesting Period):
the time period the employee earns the right to the option by working for the company

Exercise Date:
the date the employee purchases common stock from the company at the exercise price

Steps to take to record Stock Option Expense for the current period:

1) At the grant date, the value of the options is estimated using a mathematical model.

2) Compute total compensation expense. Do not adjusted in the future as the FMV changes.

3) The total compensation expense is recognized over the service period (vesting).

Compensation expense can be adjusted for changes in the number of options not expected to vest (forfeitures of employees who terminate before the vesting date).

Calculate the Expense

FMV of the stock option
x # options granted
Total Compensation expense
/ Vesting period
= Expense for this period

Note: The expense may be reduced by the estimated % of expected forfeitures

Journal Entries:

No journal entry on the grant date.

At the end of the period:

Compensation Expense        1
Paid in capital – options         1

When the options are exercised:

PIC – Options             2
Cash                            3
Common Stock               4
Paid in Capital – C.S.      5

1 Expense the current period amount

2 Remove the % of the total value that is exercised

3 Cash received is = # options exercised x exercise price

4 Common stock = # shares issued x par value

5 Paid in Capital–CS is a plug to make the journal entry balance

Stock Appreciation Rights:
Employees receive additional compensation based on how much the stock price appreciates above a base price.

Paid in stock:  Use the above formula for stock option expense to estimate the liability.

Cash payment: adjust the estimated portion of the total liability each period

Fair Market Value of stock at the end of the period
– Base price in the agreement
Increase in value of stock since agreement
x number of SARs issued
Total estimated amount to be paid at end of agreement
x A / B **
Cumulative expense to date
– Expense recognized in prior years
Expense this year

** A = years since plan started B = vesting period

Journal Entries:

Accrue an expense at the end of each period:

SAR Compensation Expense
SAR Liability

or if over expensed in prior years, reduce the expense

SAR Liability
SAR Compensation Expense

When payment is made to the employee at the end of the agreement:

SAR Compensation Liability
Cash