Instead, the accounting expense of these options is basically measured in the same manner as standard stock options. Let's see how , common shares become , diluted shares under the treasury-stock method, which, remember, is based on a simulated exercise. Opponents of expensing prioritize reliability, insisting that option costs cannot be measured with consistent accuracy. Indexed Options Because options can have value even in a company that underpreforms its industry, indexed options provide that the target price at which shares can be exercised is indexed by the performance of peers or the market in general. Case Studies Discusses the strategic and practical issues of participant communication in a variety of types of equity plans, from ESPPs to options. Downloading the guide onto an iPad. Finally, under fair value accounting, the fair value of a stock option at the time of grant is expensed over the vesting period of the option.
Almost all stock options issued under broad-based stock options plans are either nonqualified stock options (NSOs) or incentive stock options (ISOs). These plans qualify for fixed price accounting, so they do not show up on the company's income statement at the time they are granted. Some executive plans, however, use performance-based .
Discusses the strategic and practical issues of participant communication in a variety of types of equity plans, from ESPPs to options. A quick reference guide to equity compensation in the form of four double-sided laminated sheets. True stories illustrating common mistakes in implementing and operating equity compensation plans and what to do about them.
Read our membership brochure PDF and pass it on to anyone interested in employee ownership. A nonprofit membership organization providing unbiased information and research on broad-based employee stock plans. Renew an Existing Membership.
You can find many more articles on employee ownership and corporate performance in the articles section title Ownership Concepts and Research on our home page. These plans qualify for fixed price accounting, so they do not show up on the company's income statement at the time they are granted.
Some executive plans, however, use performance-based options. These plans provide that the option holder will not realize any value from the option unless specified conditions are met, such as the share price exceeding a certain value above the grant price or the company outperforming the industry. Performance-based plans can require variable plan accounting, which requires companies to show on their income statement a value determined by calculating the difference between the grant price of the options and the stock's current fair market value, multiplied by the percentage of options vested, adjusted for the cumulative prior expense recorded.
Any performance-based plan in which the measurement date the first date on which the number of shares and the exercise price are known occurs after the date of the grant triggers variable plan accounting. This "hit to earnings" discourages most companies from using at least some kinds of performance options in a broad-based plan, even though an argument can be made that shareholders should be much happier with this approach. As long as shareholders remain in blissful accounting ignorance, however, the fixed approach appears better.
Companies may also be concerned, however, that attaching a performance criterion to options may be inappropriate for non-executives because they have too little control over helping companies meet the targets. Of course, they have no more control over whether the company's stock price increases above the grant price, but the layering on of conditions may make the options seem too uncertain. Advocates for performance-based plans counter that providing specific targets can help focus employee interest on company-specific goals, whereas employees can often benefit from options simply because the industry or broad market does well.
The plans may also be easier to sell to at least some shareholders, especially if they qualify for fixed plan accounting. If these or other arguments are persuasive, several types of performance options might be considered. The plans described here are not the only choices; companies can impose all sorts of performance criteria and option terms. Whatever choice is made, however, care should be taken that it can be readily understood by employees, that it has a real chance of delivering meaningful value, that it fits with the company's culture, and that it will not cause recruitment or retention problems.
Plans That Allow Fixed Plan Accounting Performance Grants In the simplest of plans, the company grants options only on the achievement of certain specified targets, such as stock price or profits. This guide also addresses certain issues that are uppermost on the minds of individuals who are responsible for administering stock-based compensation plans.
For example, many companies are deciding to move away from service-based stock options and employee stock purchase plans in favor of awards that align compensation with company performance.
This has been accomplished through both the granting of new awards and the modification of existing awards—both of which can have significant accounting ramifications.
In assessing alternative plan designs, a company will want to address the related tax consequences for both itself and its employees. The guide explains the considerations necessary to determine if a proposed plan meets the criteria for tax deductibility and whether employees may elect to be taxed on the grant date rather than the vesting date, among others.
This guide will help companies understand the accounting rules that apply to their current stock-based compensation plans. Given the desire of many companies to better align compensation with the performance and goals of the company and its shareholders, there are sure to be developments in the area of stock-based compensation for years to come.
Share based comp have you scratching your head? Listen to this overview of the accounting model to get grounded in the basics. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. The many nuances of ASC impact not only the accounting for employee stock-based compensation, but also the related corporate income tax accounting, the calculation of earnings per share, and the presentation of the cash flow statement.
This guide was fully updated in March
Performance-Based Stock Options. Under the old rules, stock options that vest based solely on performance conditions are subject to variable accounting. Under the new rules, such performance-based options are not subject to variable accounting. Instead, the accounting expense of these options is basically measured in the same manner as . First, the experts at the Financial Accounting Standards Board (FASB) have wanted to require options expensing since around the early s. By David Harper Relevance above ReliabilityWe will not revisit the heated debate over whether companies should "expense" employee stock options. BREAKING DOWN 'Performance Shares' The goal of performance shares is to tie the interests of executives and managers to the interests of shareholders. Their goal is similar to employee stock-option plans, as they provide an explicit incentive for management to focus their efforts on maximizing shareholder value.