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Restricted Stock Award

 

*** Reacquired shares for assumed vesting of restricted stock in 2012:

$ 0 million cash proceeds

90 unexpensed compensation****

18 excess tax benefit

$108 million hypothetical proceeds

÷ $15 average market price

7.2 shares assumed reacquired

**** Calculation of proceeds from unexpensed compensation:

15 million shares x $12 = $180 million total compensation to be expensed $45 million per year over 4 years. The expense has been recorded in 2011 and 2012:

 

2011 ($ in millions)

Compensation expense 45

Paid-in capital-restricted stock 45

Compensation expense 45

Paid-in capital-restricted stock 45

So, $90 million compensation (for 2013-2014) remains unexpensed and is considered part of the hypothetical proceeds of the options.

The proceeds also are increased by the excess tax benefit:

 

$15 market price during 2012 (& thus price at hypothetical vesting)

(12) fair value at grant date (and amount expensed over the vesting period)

$ 3 excess tax deduction per share

x 15 million shares

$45 million excess tax deduction

x 40% tax rate

$18 million excess tax benefit

 

 


CASES

Real World Case 19-1

Requirement 1

The shares are restricted in such a way as to provide some incentive to the recipient. Microsoft’s restricted stock award plans are tied to continued employment. The shares are subject to forfeiture by the employee if employment is terminated within five years from the date of grant. These restrictions give the employee incentive to remain with the company until rights to the shares vest.

Requirement 2

Compensation pertaining to pre-2009 grants:

153 x $26.12 = $3,996.4 Nonvested at June 30, 2008

43 x $25.56 = (1,099.1) Vested during fiscal 2009

10 x $26.08 = (260.8) Forfeited during fiscal 2009

$2,636.5 Outstanding all year

÷ 5 yrs

$ 527.3 Expense during 2009 for outstanding restricted (nonvested) shares

 

$1,099.1 x ½ yr* = 549.6 Expense during 2009 for vested shares

Forfeited in 2009:

Granted in 2006($260.8 x 1/3 = $86.9):

Expensed in 2006: $86.9÷ 5 yrs = 17.4

Expensed in 2007: $86.9÷ 5 yrs = 17.4

Expensed in 2008: $86.9÷ 5 yrs = 17.4

Granted in 2007($260.8 x 1/3 = $91):

Expensed in 2007: $86.9÷ 5 yrs = 17.4

Expensed in 2008: $86.9÷ 5 yrs = 17.4

Granted in 2008($260.8 x 1/3 = $86.9):

Expensed in 2008: $86.9÷ 5 yrs = 17.4

(104.4) Reduction in expense for forfeited shares**

$ 972.5 2009 expense for previous awards


Case 19-1 (concluded)

$ 972.5 2009 expense for previous awards

2009 grants:

86.9x $24.95 ÷ 5 yrs x ½ yr = 216.8 2009 expense for 2009 awards

$1,189.3 Total 2009 expense

 

* vested evenly throughout the year

** expense is reduced in year of forfeiture for amount expensed in two previous years


Communication Case 19-2

Suggested Grading Concepts and Grading Scheme:

Content(80% )

30 Measurement of compensation.

Compensation cost should be measured at the date of grant.



Fair value of the stock options.

Estimated by employing a recognized option pricing model.

Value per option times number of options.

Can be adjusted for estimated forfeiture rate.

No entry on grant date.

25 Determination of compensation expense.

Expensed over the period of service for which the options are given, 2011 - 2013.

Debit compensation expense.

Credit paid-in capital – stock options.

Not adjusted when the price of the underlying stock changes.

15 Effect of forfeiture before vesting.

Reduce compensation expense in forfeiture period for the cumulative effect of the revised estimate.

Revise compensation expense for remaining service period.

10 Effect of forfeiture after vesting.

Paid-in capital - stock options becomes Paid-in capital - expiration of stock options.

Compensation expense of previous periods cannot be reversed for vested options.

Bonus (5) For unvested, non-qualifying options:

Proceeds for TS method include unexpensed compensation.

Proceeds for TS method include excess tax benefit.

Bonus (5) Option pricing model considers:

Exercise price of the option.

Expected term of the option.

Current market price of the stock.

Expected dividends.

Expected risk-free rate of return.

Expected volatility of the stock.

80-85 points


Case 19-2 (concluded)

Writing (20%)

5 Terminology and tone appropriate to the audience of controller.

6 Organization permits ease of understanding.

introduction that states purpose.

paragraphs separate main points.

9 English.

word selection.

spelling.

grammar.

20 points

 


Ethics Case 19-3

Discussion should include these elements:

Facts:

The choice of method will affect earnings. FIFO will increase reported net income.

FIFO will cause an increase in taxes paid.

Company managers stand to benefit from the change.

The auditor risks negative consequences if the change is challenged.

Ethical Dilemma:

Is the auditor’s obligation to challenge the questionable change in methods greater than the obligation to the financial interests of the CPA firm and its client?

Who is affected?

You, the auditor

Managers

CPA firm (lost fees? reputation? legal action?)

Shareholders

Potential shareholders

[From research performed in this area, it is not clear that accounting changes that increase earnings without any real economic (cash flow) effect will have the desired effect of increasing share price. In fact, the preponderance of such research indicates that the market “sees through” cosmetic accounting changes. Nevertheless, there is plenty of evidence, at least anecdotal, that managers attempt to fool the market. Some efforts to manage earnings may not be an attempt to affect share prices, but to avoid violating terms of contracts based on earnings or related balance sheet items. Some may be to favorably affect terms of compensation agreements.]

The employees

The creditors

 

 


Date: 2016-01-14; view: 745


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