Question

Robert Company is contemplating the establishment of a share-based compensation plan to provide long-run incentives for its top management. However, members of the compensation committee of the board of directors have voiced some concerns about adopting these plans, based on news accounts related to a recent accounting standard in this area. They would like you to conduct some research on this recent standard so they can be better informed about the accounting for these plans. Instructions Using the FASB Accounting Standards Codification Reporting System, respond to the following items. (Provide Codification references for your responses.)

a. Identify the authoritative literature that addresses the accounting for share-based payment compensation plans.

b. Briefly discuss the objectives for the accounting for stock compensation. What is the role of fair value measurement?

c. The Robert Company board is also considering an employee share-purchase plan, but the Board does not want to record expense related to the plan. What criteria must be met to avoid recording expense on an employee stock-purchase plan?

Answer 1

Answer:

1. The following topic was used to identify the authoritative literature that addresses the accounting for share-based payment compensation plans: Expenses: 71x Compensation: 718 Compensation-Stock Compensation.

The paragraph provided at 718-10-25-3 states, “the accounting for all share-based payment transactions shall reflect the rights conveyed to the holder of the instruments and the obligations imposed on the issuer of the instruments, regardless of how those transactions are structured. For example, the rights and obligations embodied in a transfer of equity shares to an employee for a note that provides no recourse to other assets of the employee (that is, other than the shares) are substantially the same as those embodied in a grant of equity share options. Thus, that transaction shall be accounted for as a substantive grant of equity share options”, (FASB).

Information provided in 718-10-25-6 through 718-10-25-19 will help to identify whether the share-based payment compensation should be classified as a liability or as equity. Once a determination is made on whether it will be classified as a liability or as equity, it will be useful to identify whether Robert Company is a public or non-public entity.

2. The FASB Codification 718 section 10 lists two objectives for accounting of stock-based compensation. The first objective 10-1 recognizes that shares are an exchange for services rendered by employees (FASB, n.d.). In other words, it is a type of payment for services except shares replace other types of compensation such as cash bonuses.

The second objective 10-2 relates to the costs incurred from share-based compensation. The FASB suggests that the share value and the costs from this type of compensation are recognized at fair value (FASB, n.d.). However, it does not include the stock ownership plans considered to be a benefit plan not compensation.

3. Employee stock purchase plans are generally subject to compensation cost. However, the FASB Recognition section of Codification 718-50 subsection 25 suggests that companies are not subject to expenses if the purchase plan is non-compensatory (FASB, n.d.). The employee stock purchase plan must meet several criteria before it is considered as non-compensatory.

This criterion suggests that employee stock purchase plans must be invariable from shares available to the public for the same class of shares. The shares cannot have more than a 5% discount or be less than the cost of the share. All qualified employees must be able to participate in this plan. The plan does not have options other than having a 31 day enrolment period and can cancel before the purchase date. If the Richardson Company wants to avoid recording expenses for an employee stock purchase plan, it must meet these requirements.