Kế toán, kiểm toán - Chapter 19: Share - Based compensation and earnings per share

SHARE-BASED COMPENSATION AND EARNINGS PER SHAREChapter 19© 2013 The McGraw-Hill Companies, Inc.Share-Based CompensationCompensation: Salary Share awardsShare Award PlansRestricted share plans Usually tied to continuing employment, Compensation is market price at date of grant, Compensation expense accrued over service period. Share Option PlansShare option plans give employees the option to buy a specified number of shares of the firm's  share, at a specified exercise price, 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). Expense – The Great DebateHistorically, options have been measured at their intrinsic value – the simple difference between the market price of the shares and the option price at which they can be acquired. If the market and exercise price are equal on the date of grant, no compensation expense is recognized even if the options provide executives with substantial income.Current RequirementsThings changed in November 2002 when the IASB issued its exposure draft ED 2 on Share-based Payment . (This was followed by the standard IFRS No. 2 in February 2004.) The release of ED 2 came in the aftermath of the accounting scandals and the “dot-com” crisis, and the shell-shocked market were more willing to accept a higher level of discipline with regards to disclosures on management compensation. Thus the requirement for companies to measure options at their fair values at the time they are granted and to expense that amount over the appropriate service period became required under both IFRS and U.S. GAAPMeasurement ObjectivesThe accounting objective is to report the fair value of compensation expense during the period of service for which the compensation is given.The objective is to measure the fair value of the services rendered by the share option recipients.IFRS No. 2 assumes that, typically, it is not possible to measure directly the fair value of services rendered – especially by employees.Thus, an indirect measure is allowed. The fair value of the share option granted is deemed the fair value of the services renderedRecognizing Fair Value of OptionsAccounting for share options parallels the accountingfor restricted share we discussed earlier. We now arerequired to estimate the fair value of share optionon the grant date.IFRS (and U.S. GAAP) requires that compensation expense be measured using one of several option pricing models that deal with:1. Exercise price of the option.2. Expected term of the option.3. Current market price of the share.4. Expected dividends.5. Expected risk-free rate of return.6. Expected volatility of the share.Plans with Performance or Market ConditionsIf compensation from a share option depends on meeting a performance target, then whether we record compensation depends. Initially on the best available estimate of the expected number of options that will vest (i.e. based on the company’s assessment of the likelihood of the performance target being met) and Ultimately on whether the performance target actually is met.If the target is based on changes in the market rather than on performance, we record compensation as if there were no target.U. S. GAAP vs. IFRSA deferred tax asset (DTA) is created for the cumulative amount of the fair value of the options the company has recorded for compensation expense.Account for each vesting amount separately or account for the entire award on the straight-line basis over the entire vesting period.There are more similarities than differences in the treatment of share options. One major difference is the treatment of deferred tax assets and when options have graded-vesting.The deferred tax asset is not created until the award is “in the money;” that is it has intrinsic value.Straight-line choice is not permitted. Companies not required to recognize the award that has vested by each reporting date.Plans With Graded-VestingRather than share option plans vesting on a single date, more plans awards specify that recipients gradually become eligible to exercise their options rather than all at once. This is called “graded vesting.”The company should view each vesting group separately, as if it were a separate award. For example, a company may award share options that vest 25% in the first year, 25% in second year, and 50% the third years. For accounting purposes we have three separate awards. The straight-line method is not allowedEmployee share option plans Permit employees to buy shares directly from  their employer.  Usually the plan is considered compensatory,  and compensation expense is recorded. As long as ..A company grants all holders of a particular class the right to buy equity instruments at a discount and An employee happens to be an investor in that particular class and transacts with the company as an investor The option plan it is simply record as a sale of new shares to employees:Employee share option plans However, If the discounted sale is meant to benefit only employees and is not extended to all investors in a particular class, accounting is similar to other share-based plans.  The discount to employees, then, is considered to be compensation, and that amount is recorded as expense.  The company measures the difference between the fair value of shares issued and the cash received as the compensation expenseCash (100 × $8.50) 850Compensation expense (100 × $1.50) 150 Ordinary shares (100 × $10.00) 1,000Market valueEarnings Per Share (EPS)Of the myriad facts and figures generated by accountants, the single accounting number that is reported most frequently in the media and receives by far the most attention by investors and creditors is earnings per share.Simple Capital Structure(Basic EPS)Basic Earnings Per ShareNet income (after tax) – preference dividends* Weighted average outstanding ordinary share *Current period’s cumulative preference bonus issues (whether or not declared) and noncumulative preference bonus issues (only if declared). Number of shares outstanding× Number of months outstanding ÷ 12 Weighted average shares outstandingIssuance of New Shares Compute the weighted average number of shares of ordinary share outstanding.Issuance of New Shares Compute the weighted average number of shares of ordinary share outstanding.100,000 + [50,000 × (9/12)] + [10,000 × (3/12)] = 140,000Shares at Jan. 1NewSharesNewSharesAnnualWeightingAnnualWeightingBonus Issues and Share SplitsOrdinary shares issued as part of bonus issues (also known as share or stock dividends) and share splits are treated retroactively as subdivisions of the shares already outstanding at the date of the split or dividend.Bonus Issues and Share Splits Compute the weighted average number of shares of ordinary share outstanding.Bonus Issues and Share Splits Compute the weighted-average number of shares of ordinary share outstanding.100,000 × (2.00) + [50,000 × (9/12) × 2.00] = 275,000Shares at Jan. 1NewSharesbonus issueadjustmentAnnualWeightingBonus Issues and Share SplitsRetroactive treatment:Bonus issue or split is treated as outstanding from the beginning of the period.Bonus issue or split is applied retroactively in proportion to the number of shares outstanding at the time of the dividend or split.New sharesissued this period?YesNoShare Buy-BackIf shares were reacquired during the period, the weighted-average number of shares is reduced. The number of reacquired shares is time-weighted for the fraction of the year they were not outstanding.Share Buy-Back Compute the weighted-average number of shares of ordinary share outstanding.Share Buy-Back Compute the weighted-average number of shares of ordinary share outstanding.100,000 + [50,000 × (9/12)] - [12,000 × (8/12)] = 129,500Shares at Jan. 1NewSharesTreasurySharesAnnualWeightingAnnualWeightingEarnings Available toOrdinary ShareholdersNet incomeLess: Current period’s cumulative preference share* dividends (whether or not declared)Less: Noncumulative preference share* dividends (only if declared)Net income available to ordinary shareholders*Or more senior classes of shareholdersComplex Capital Structure(Dual EPS)Dilution/Antidilution TestShareOptionsConvertible securitiesTreasury share methodIf-converted methodContingently issuable sharesPotential Ordinary Shares: Share options and warrants Convertible bonds and share Contingent ordinary share  issuesDiluted Earnings Per ShareMay Report Basic and Diluted Earnings Per ShareOptions, Rights, and WarrantsProceedsUsed toPurchase treasury sharesAt average market priceThe treasury share method assumes that proceeds from the exercise of options are used to purchase treasury shares. This method usually results in a net increase in shares included in the denominator of the calculation of diluted earnings per share.Options, Rights, and WarrantsProceeds from assumed exerciseAverage-of-period market price of shareDetermine new shares from assumed exercise of share options.Compute number of shares repurchased. Options, Rights, and WarrantsDetermine new shares from assumed exercise of share options.Compute shares purchased for the treasury. Compute the incremental shares assumed outstanding.New shares from assumed exercise (1)Less: Treasury shares assumed purchased (2)Net increase in shares outstanding (3)Options and WarrantsWhen the exercise price exceeds the market price, the securities are antidilutive and are excluded from the calculation of diluted EPS.Anti-Dilutive SecuritiesThe  sequence in which we include a potential ordinary share matters. We have to include the most dilutive security first and stop at the point when the diluted EPS is at the lowest point. We rank the dilutive effects of each potential ordinary share by calculating their earnings per incremental share (EPIS). The EPIS is the after-tax earnings saved from the assumed conversion or exercise of the potential ordinary shares divided by the increase in number of ordinary shares. The higher the EPIS, the lower the dilutive impactWhen all the dilutive securities are included in the calculation of diluted EPS, at the same time, we may not arrive at a diluted EPS that is the lowest possible figure or the “worst case” EPS. Anti-Dilutive SecuritiesIn-the-money” option or warrant is the most dilutive security among potential ordinary shares. After applying the treasury stock method, there is a zero effect on the numerator and a positive effect on the denominator.Options or warrants may be relatively more dilutive than other potential ordinary shares, but there may be times when options or warrants may be anti-dilutive. For example when the options are" out-of-the-money".Convertible Securities The if-converted method is used for convertible debt and equity securities.The method assumes conversion occurs as of the beginning of the period or date of issuance, if later. Convertible SecuritiesThe assumed conversion of convertible bonds or preference shares has two effects on dilutive earnings per share:increases the denominator by the number of ordinary shares issuable upon conversion,increases the numerator by decreasing after-tax interest expense on convertible bonds, and dividends on convertible preference shares.Anti-Dilutive SecuritiesFor convertible securities (convertible bonds and convertible preference shares), we determine whether convertible securities are dilutive by comparing the “incremental effect” on EPS from the assumed conversion. The incremental effect (of conversion) of the bonds is the after-tax interest saved divided by the additional ordinary shares from conversion.The incremental effect (of conversion) of the preference shares is the dividends that wouldn’t be paid divided by the additional ordinary shares from conversion. If the incremental effect is higher than the basic EPS, then it is anti-dilutive.Additional EPS IssuesContingent shares are issuable in the future for little or no cash consideration upon the satisfaction of certain conditions. Contingently issuable shares are considered to be outstanding in the computation of EPS if the target performance level already is being met.Contingently Issuable SharesContingently Issuable SharesShares are issued merely due to passage of time.Some target performance level has already been met and is expected to continue to the end of the contingency period.Contingent shares are included in dilutive EPS if:Example: Additional shares may be issued based on future earnings. Restricted SharesRestricted shares are quickly replacing share options as the share-based compensation plan of choice. Like share options, the treasury stock method is used to calculate the number of shares in the denominator of the EPS equation. Unlike share options, employees do not pay to acquire their shares.No adjustment to the numeratorDenominator is increased using treasury methodSummarySummaryFinancial Statement PresentationReport EPS data separately for:Income from Continuing Operations Discontinued OperationsNet IncomeAppendix 19A – Option-Pricing TheoryIntrinsic value is the benefit the holder of an option would realize by exercising the option rather than buying the underlying share directly. An option that permits an employee to buy $25 share for $10, has an intrinsic value of $15.Options have a time value because the holder of an option does not have to pay the exercise price until the option is exercised.SummaryThe fair value of an option is (a) its intrinsic value plus (b) its time value of money plus (c) its volatility component. The SARs are considered to be equity if the employer can elect to settle in shares; Unless the employer has a present obligation to the employee to settle in cash, or unless the employee has a valid expectation to receive cash The amount of compensation is estimated at the grant date as the fair value of the SARs.  This amount is expensed over the service period.Appendix 19B - Share Appreciation RightsUsually the same as the fair value of a share option with similar terms.Share Appreciation Rights The SARs are considered to be a liability if the employee has the right to receive cash upon settlement. In that case, the amount of compensation (and related liability) is estimated each period and continuously adjusted to reflect changes in the fair value of the SARs until the compensation is finally paid. The current expense (and adjustment to the liability) is the fraction of the total compensation earned to date by recipients of the SARs (based on the elapsed percentage of the service period), reduced by any amounts expensed in prior periods.  The employer may have to recognize the expense immediately if the services have already been receivedShare Appreciation RightsIf the employee has a right to choose between cash and equity, the employer has effectively granted a compound financial instrument comprising of a liability and an equity component. The fair value of the compound financial instrument is the sum of the fair values of the two components.The employer first measures the fair value of the debt component and then measures the fair value of the equity component. In most cases, the employee or a supplier (who has the choice of settlement) will structure the two components to be of equal value, thus recognizing only a liability.End of Chapter 19