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Lecture Outline: Share-Based Compensation and Earnings Per Share

This document discusses share-based compensation and earnings per share. It provides an overview of common forms of compensation tied to company stock prices, including stock awards, stock options, and stock appreciation rights. These plans create shareholders' equity and often affect earnings per share calculations by treating them as potential common shares. The document outlines learning objectives and topics to be covered, such as accounting for different types of stock plans and incorporating various securities into EPS calculations.

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Franz Apple
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31 views

Lecture Outline: Share-Based Compensation and Earnings Per Share

This document discusses share-based compensation and earnings per share. It provides an overview of common forms of compensation tied to company stock prices, including stock awards, stock options, and stock appreciation rights. These plans create shareholders' equity and often affect earnings per share calculations by treating them as potential common shares. The document outlines learning objectives and topics to be covered, such as accounting for different types of stock plans and incorporating various securities into EPS calculations.

Uploaded by

Franz Apple
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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CHAPTER 19

SHARE-BASED COMPENSATION AND EARNINGS PER SHARE


Overview
We’ve discussed a variety of employee compensation plans in prior chapters, including
pension and other postretirement benefits in Chapter 17. In this chapter we look at some
common forms of compensation in which the amount of the compensation employees receive
is tied to the market price of company stock. We will see that these “share-based”
compensation plans – stock awards, stock options, and stock appreciation rights - create
shareholders’ equity, the topic of the previous chapter and also often affect the way we
calculate earnings per share, the topic of the second part of the current chapter. Specifically,
we view these as ”potential common shares” along with convertible securities and calculate
earnings per share as if they already had been exercised or converted into additional common
shares.

Learning Objectives
1. Explain and implement the accounting for stock award plans.
2. Explain and implement the accounting for stock options.
3. Explain and implement the accounting for employee share purchase plans.
4. Distinguish between a simple and a complex capital structure.
5. Describe what is meant by the weighted average number of common shares.
6. Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split,
and the reacquisition of shares.
7. Describe how preferred dividends affect the determination of EPS.
8. Describe how options, rights, and warrants are incorporated in the calculation of EPS.
9. Describe how convertible securities are incorporated in the calculation of EPS.
10. Determine whether potential common shares are antidilutive.
11. Determine the three components of the proceeds used in the treasury stock method.
12. Explain the way contingently issuable shares are incorporated in the calculation of EPS.
13. Describe the way EPS information should be reported in an income statement.
14. Discuss the primary differences between U.S. GAAP and IFRS with respect to
accounting for share-based compensation and EPS.

Lecture Outline
Part A: Share-Based Compensation
A. Typically, an executive compensation plan is tied to performance in a way that uses
compensation to motivate its recipients.
B. Many plans include share-based awards.
C. Whichever form such a plan assumes, the accounting objective is to record the fair
value of compensation expense over the periods in which related services are
performed.
D. This requires:
1. Determining the fair value of the compensation.
2. Expensing that compensation over the periods in which participants perform
services.

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