STOCK AWARD PLANS

 Usually, restricted shares are subject to forfeiture if the

employee doesn’t remain with the company.

 The share value is accrued as compensation expense over

the service period for which participants receive the shares,
usually from the date of grant to when restrictions are lifted
(the vesting date).

T19-1
 STOCK AWARD PLANS ILLUSTRATION
Under its restricted stock award plan, Universal
Communications grants 5 million of its $1 par common shares to
certain key executives at January 1, 2011. The shares are
subject to forfeiture if employment is terminated within 4 years.
Shares have a current price of $12 per share.
January 1, 2011
No entry
Calculate total compensation expense:
$12 fair value per share
x 5 million shares awarded
= $60 million total compensation
The total compensation is allocated to expense over the 4-year
service (vesting) period: 2011 - 2014
$60 million ÷ 4 years = $15 million per year
December 31, 2011, 2012, 2013, 2014 ($ in millions)
Compensation expense ($60 million ÷ 4 years) ............. 15
Paid-in capital – restricted stock ........................ 15
December 31, 2014
Paid-in capital– restricted stock (5 million sh. at $12) ... 60
Common stock (5 million shares at $1 par) ................. 5
Paid-in capital – excess of par (to balance) ............ 55
 If restricted stock is forfeited because, say, the employee
quits the company, related entries previously made would
simply be reversed.
Illustration 19-1
T19-2
 STOCK OPTION PLANS

 Stock option plans give employees the option to purchase

(a) a specified number of shares of the firm's stock, (b) at a
specified price, (c) during a specified period of time.

 The fair value is accrued as compensation expense 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).

 This requires the use of an option pricing model. The

model should take into account the:
• exercise price of the option
• expected term of the option
• current market price of the stock
• expected dividends
• expected risk-free rate of return during the term of the
option
• expected volatility of the stock

T19-3
 Tax Implications
 For tax purposes, plans can either qualify as an “incentive
stock option plan” under the Tax Code or be "unqualified
plans."

 Among the requirements of a qualified option plan is that

the exercise price be equal to the market price at the grant
date. Under a qualified incentive plan, the recipient pays
no income tax until any shares acquired are subsequently
sold. On the other hand, the company gets no tax
deduction at all.
 With a nonqualified plan the employee
 1. The award is considered to be equity if the employer can elect to settle in
shares of stock rather than cash.
2. The award is considered to be a liability if the employee can elect to receive
cash (which usually is the case).
3. When considered debt, the amount of compensation is continually adjusted to
reflect changes in the fair value of the SARs until the SARs expire or are
exercised. (T19-28, T19-29)
4. When the award is considered equity fair value is measured at the grant date.

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