1. Chapter 16 Appendix 16B Chapter 16 Appendix 16B Stock Compensation Plans – Additional Complications Prepared by: Dragan Stojanovic, CA Rotman School of Management, University of Toronto

2. 2 Compensation Expense Two common plans with unique accounting issues 1.Stock appreciation rights plans Affords the right to receive compensation equal to share appreciation 2.Performance-type plans Where compensation not based on share appreciation Criteria normally based on corporate performance

3. 3 Stock Appreciation Rights (SARs) SARs designed to mitigate employee’s cash flow problems in non-qualified plans Employee receives any appreciation in share value –Appreciation = Market price at exercise date less a pre-established price Appreciation paid out in cash, shares, or combination

4. 4 Stock Appreciation Rights (SARs) How is compensation expense measured from date of grant to date of exercise? Percentage approach applied: Cost = (current market price - option price) times number of stock appreciation rights outstanding Cost allocated over the service period IFRS requires that SAR be valued using options pricing model Problem occurs when exercise date goes beyond service period

5. 5 SARs – Final Notes Compensation expense adjusted whenever stock price changes Change is reported in subsequent periods until rights expire or when exercised, whichever comes first Cumulative compensation expense can never have a negative value

6. 6 Stock Appreciation Rights (SARs) - Example Given: SAR program established: January 1, 2012 SAR exercise period: any time during next five years Pre-established price per SAR: $10 Number of SARs granted: 10,000 Market prices of the stock: Dec 31, 2012: $ 13; Dec 31, 2013: $17; Dec 31, 2014: $ 15 Service period: 2 years (2012 - 2013) The SARs are held for 3 years, then exercised Determine the compensation expense for 2012, 2013, and 2014

7. 7 Stock Appreciation Rights (SARs) - Example Date Cumulative Percentage Comp. Expense Dec 31 st Compensation Accrued based on Recognized for Recognizable Service Period the current year 2012 10,000 * ($13-$10) 50% $30,000 / 2 = $ 30,000 = $15,000 2013 10,000 * ($17-$10) 100% $ 70,000 - $15,000 = $ 70,000 = $55,000 2014 10,000 * ($15-$10) 100% * $ 50,000 - $70,000 = $ 50,000 = ($20,000) *Exercise date occurs before rights expiry date, final adjustment required in 2014 Journal Entries

8. 8 Stock Appreciation Rights (SARs) - Entries Debit Credit Dec 31, 2012Compensation Expense 15,000 Liability under SARs15,000 Dec 31, 2013Compensation Expense 55,000 Liability under SARs55,000 Dec 31, 2014Liability under SARs 20,000 Compensation Expense20,000 Dec 31, 2014Liability under SARs 50,000 Cash50,000 (SARs exercised end of the third year)

9. 9 Performance-Type Plans Designed to separate market behavior from executive performance measurement Examples of performance measurement criteria might include: –ROA or ROE –EPS growth Measurement date is the date of exercise Compensation cost allocated to periods involved using the percentage approach

10. 10 Copyright © 2010 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein. COPYRIGHT