Question

You join the accounting department of a major tech firm after graduation and are asked to assist in preparing end of year adjusting entries to prepare the firm's financial statements for the end of the fiscal year. One major item you discover is a large part of the firm's compensation expense is for stock grants and restricted stock units (RSUs). You are unsure how to account for these and so turn to the codification for guidance. What is the accounting for these forms of compensation and how are they presented on the financial statements?

***codification is referring to the FASB Accounting Codification

Answer 1

So there are two things to be addressed here -

1) Stock grant for other than restricted units  (stock based compensation) - Accounting Standards Codification (ASC) 718 specifies the treatment for this kind of salary expense.

Stock based compensation is treated as "Non cash expense" on the income statement. Further SBC is an operating expense and hence presented under respective operating line items. For example if SBC is given to direct labour this will go to "cost of goods sold".

As on the date of grant - nothing happens in the books. These do not impact equity on grant date. After a year of vesting these stock options are charged to "retained earnings". Once the excercise happens - the cash proceeds and options are debited and common stock account is credited .

2) Restricted stock units -

Unearned compensation account (contra equity effect) will be debited and common stock is credited. But after say one year - Contra equity created above gets credited by charging the amount to "retained earnings". Finally say, if the employee forfeit their restricted stock .

Contra equity will be debited and retained earnings gets credited to close of the accounts.