How to Account for Stock Based Compensation
Distinguish between important dates., Choose a method for determining the value of the stock-based compensation., Find the value of restricted stock., Calculate stock option value.
Step-by-Step Guide
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Step 1: Distinguish between important dates.
There are several important dates associated with stock compensation plans.
Each one is essential to properly recording and reporting options plans.
In order, they are:
The grant date.
This represents when the date at which employee is compensated.
The vesting date.
The date at which, in a stock option plan, an employee can exercise their options (to buy stock shares).
The exercise date.
The date at which the employee chooses to exercise his or her options.
If they choose to not exercise their options, there will not be an exercise date recorded.
Expiration date.
The date at which any remaining, unexercised options expire. -
Step 2: Choose a method for determining the value of the stock-based compensation.
In order to be recorded in journal entries, the stock compensation must be appropriately valued.
The two most common methods recognized by the Financial Accounting Standards Board (FASB) are intrinsic value and fair value methods.
Intrinsic value refers to the difference between the stock price when the stock is granted and the price of the stock at the earliest date the stock vests and can be sold.
Fair value bases the value of stock on a complex model of factors that estimates the value of the stock or option at the time of the grant.Publicly-traded companies are required to use the fair value method.
Non-public companies may use either method., Restricted stock, also known as non-vested stock, includes stock compensation that has not yet become vested.
This means that employees given this stock are currently unable to exercise their options or sell the stock that they have been compensated with.
The fair value of this stock is recorded as the market price of a share of the stock on the grant date.
The total value of each plan's restricted stock is the number of shares multiplied by the fair value., Stock option fair values are somewhat more complicated to calculate than the fair values of stock shares.
Option values are calculated using a model that takes into consideration the market price at the grant date, the price at which the option is exercised, volatility, expected dividends, and the risk-free interest rate.The Black-Scholes model is one of the more common methods for fair-value estimation of options.
This calculation is typically handled by accounting or financial modeling software. -
Step 3: Find the value of restricted stock.
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Step 4: Calculate stock option value.
Detailed Guide
There are several important dates associated with stock compensation plans.
Each one is essential to properly recording and reporting options plans.
In order, they are:
The grant date.
This represents when the date at which employee is compensated.
The vesting date.
The date at which, in a stock option plan, an employee can exercise their options (to buy stock shares).
The exercise date.
The date at which the employee chooses to exercise his or her options.
If they choose to not exercise their options, there will not be an exercise date recorded.
Expiration date.
The date at which any remaining, unexercised options expire.
In order to be recorded in journal entries, the stock compensation must be appropriately valued.
The two most common methods recognized by the Financial Accounting Standards Board (FASB) are intrinsic value and fair value methods.
Intrinsic value refers to the difference between the stock price when the stock is granted and the price of the stock at the earliest date the stock vests and can be sold.
Fair value bases the value of stock on a complex model of factors that estimates the value of the stock or option at the time of the grant.Publicly-traded companies are required to use the fair value method.
Non-public companies may use either method., Restricted stock, also known as non-vested stock, includes stock compensation that has not yet become vested.
This means that employees given this stock are currently unable to exercise their options or sell the stock that they have been compensated with.
The fair value of this stock is recorded as the market price of a share of the stock on the grant date.
The total value of each plan's restricted stock is the number of shares multiplied by the fair value., Stock option fair values are somewhat more complicated to calculate than the fair values of stock shares.
Option values are calculated using a model that takes into consideration the market price at the grant date, the price at which the option is exercised, volatility, expected dividends, and the risk-free interest rate.The Black-Scholes model is one of the more common methods for fair-value estimation of options.
This calculation is typically handled by accounting or financial modeling software.
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Evelyn Evans
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