Chapter 21

Share-based Compensation
and Earnings per Share

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Learning Objective 1

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Share-based Compensation Plans
Select employees receive compensation in a form other
than cash as a way to encourage superior performance and
retain and recruit employees.

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Restricted Stock Plans
Restricted stock SHARE awards
Stock is issued at the grant date to an employee, but the employer
holds the stock through the vesting period.
The employee must satisfy vesting requirements in order to be awarded
the stock or the shares are forfeited.
To account for the award:

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Restricted Stock Plans

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Restricted Stock Plans

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Restricted Stock Plans
Restricted stock UNIT awards
Employer grants a right to an employee to receive stock at a future date
under certain conditions.
Fair value of the compensation is determined at the date of grant.
The employee must satisfy vesting requirements in order to be awarded
the stock or the shares are forfeited.
To account for the award:

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Restricted Stock Plans

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Restricted Stock Plans

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Restricted Stock Plans

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Restricted Stock Plans

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Learning Objective 2

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Stock Options
Gives an employee a right to buy a specified number of shares at
an established price.
Provides the employee an incentive to increase the market price
of stock (short-term focused).
Measure cost of compensation at the fair value of the award at
the date of grant using an option-pricing model, which considers
variables including the current price of stock, term of the
options, risk-free rate of interest, expected volatility of stock
price, expected dividend yield.

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Stock Options

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Stock Options
Accounting for stock options:

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Stock Options

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Learning Objective 3

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Employee Share Purchase Plan
Allows employees the opportunity to purchase shares of stock of their
employer at a discounted price.

Compensation expense is NOT recorded if all of the following

conditions are met:
• Terms of the plan are no more favorable than those available to all
holders of the same class of shares
• Any purchase discount is not significant
• Substantially all employees may participate on an equitable basis
• The plan incorporates no option features, other than the exceptions
noted

If any condition is not met, company must recognize compensation

expense for the stock discount extended to employees.
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Employee Share Purchase Plan

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Employee Share Purchase Plan
Example One—Shares Issuance Under a Noncompensatory Employee Share Purchase Plan

Example two—Shares Issuance Under a Compensatory Employee Share Purchase Plan

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Learning Objective 4

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Basic Earnings per Share

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Basic Earnings per Share

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Basic Earnings per Share

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Learning Objective 5

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EPS Calculation

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EPS Calculation

 Share Issuances and Buybacks

To calculate weighted-average common shares outstanding, shares issued and
reacquired are weighted for the portion of the period that they were outstanding.

 Stock Splits and Dividends

For EPS calculations, adjust the number of shares outstanding retroactively,
even if stock dividend or stock split takes place after the balance sheet date

 Preferred Stock Dividends

Numerator includes income available to common shareholders, so
preferred dividends declared must be subtracted from net income.

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EPS Calculation

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EPS Calculation
Example 1

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EPS Calculation
Example 2

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EPS Calculation
Example 3

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EPS Calculation
Example 3

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EPS Calculation
Example 4

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EPS Calculation
Example 5

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Let’s Exercise…

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Learning Objective 6

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The “If-Converted” Method
A complex capital structure exists when a company owns
financial instruments that have the potential to increase common
shares, through exercise or conversion, that could result in a
decrease to EPS in the future.
Diluted EPS is earnings available to each share of common stock
outstanding during the period plus each dilutive potential
common share outstanding
 A security is dilutive if EPS is reduced when incorporating the
effects of an assumed conversion or exercise of common stock.

 A security is antidilutive if EPS is not reduced when incorporating

the effects of an assumed conversion or exercise of common stock
(antidilutive securities are not considered in diluted EPS calculation)

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Convertible Bonds
Convertible bonds are financial instruments with the potential to
convert to common stock, so the effect of a conversion is considered
when computing diluted EPS.
Use the “if-converted” method to determine whether convertible bonds
are dilutive and if so, the impact on diluted EPS.
1. Assume a hypothetical conversion at the beg. of period (or issue
date if later).
2. Determine whether diluted EPS is less than basic EPS.

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Convertible Bonds

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Convertible Bonds

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Convertible Bonds

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Convertible Preferred Stock
Convertible preferred stock is a financial instrument with the potential
to convert to common stock, so the effect of a conversion is
considered when computing diluted EPS.
Use the “if-converted” method to determine whether convertible
preferred stock is dilutive and if so, the impact on diluted EPS.
1. Assume a hypothetical conversion at the beg. of period (or issue
date if later).
2. Determine whether diluted EPS is less than basic EPS.

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Convertible Preferred Stock

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Convertible Preferred Stock

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Convertible Preferred Stock

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Let’s Exercise…

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