Question

What are the 2 main accounting goals for recording share-based compensation? Give 2 examples of share-based compensation.

Answer 1

Answer:-

Stock-Based Compensation (also called Share-Based Compensation or Equity Compensation) is a way of paying employees, executives, and directors of a company with shares of ownership in the business. It is typically used to motivate employees beyond their regular cash-based compensation (salary and bonus) and to align their interests with those of the company. Shares issued to employees are usually subject to a vesting period before they can be sold.

Under US GAAP, stock-based compensation (SBC) is recognized as a non-cash expense on the income statement. Specifically, SBC expense is an operating expense (just like wages) and is allocated to the relevant operating line items:

1. SBC issued to direct labor is allocated to cost of goods sold.
2. SBC to R&D engineers is included within R&D expenses.
3. SBC for management and those involved in selling and marketing is included in SG&A and other operating expenses.