3. Answer the following questions from Professional Research, FASB Codification.
ID: 2566193 • Letter: 3
Question
3. Answer the following questions from Professional Research, FASB Codification. Use the link and the password provided in the syllabus to access the FASB Codification to answer questions. I have provided a handout about the Codification and an example of proper citations. Cite the paragraphs where you found these answers. Answer the questions in an essay format; i.e., as a writing assignment. a. In your own words, discuss the objectives for accounting for stock compensation. b. What is role of fair value measurement for stock options? c. Pet Smart has restricted stock awards to executives. Explain the proper accounting for these. Using the Codification, how should Pet Smart measure non-vested restricted shares on the grant date? What about vested restricted shares?Explanation / Answer
Stock-based compensation plans are used to both motivate and reward managers. Two common types of stock based plans are non-transferrable Employee Stock Option Plans (ESOPs) and non-transferrable Stock Appreciation Rights (SARs).
The FASB is looking for ways to reduce cost and complexity in accounting for share-based payments, while maintaining or improving the quality of information provided to investors and other financial statement users.
The Board has made tentative decisions to make improvements to simplify the accounting for share-based payment, including:
The Board also instructed the staff to conduct pre-agenda research on the following ideas from stakeholders:
Role of Fair value measurement on stock options
This Statement defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. The fair value based method is preferable to the Opinion 25, method for purposes of justifying a change in accounting principle under APB Opinion No. 20, Accounting Changes. Entities electing to remain with the accounting in Opinion 25, must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in this Statement had been applied.
Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. Most fixed stock option plans-the most common type of stock compensation plan-have no intrinsic value at grant date, and under Opinion 25 no compensation cost is recognized for them. Compensation cost is recognized for other types of stock-based compensation plans under Opinion 25, including plans with variable, usually performance-based, features.
For stock options, fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life ofthe option. Nonpublic entities are permitted to exclude the volatility factor in estimating the value of their stock options, which results in measurement at minimum value. The fair value of an option estimated at the grant date is not subsequently adjusted for changes in the price of the underlying stock or its volatility, the life of the option, dividends on the stock, or the risk-free interest rate.
Nonvested Stock
The fair value of a share of nonvested stock (usually referred to as restricted stock) awarded to an employee is measured at the market price of a share of a nonrestricted stock on the grant date unless a restriction will be imposed after the employee has a vested right to it, in which case fair value is estimated taking that restriction into account.
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