1. TENTH CANADIAN EDITION INTERMEDIATE ACCOUNTING PREPARED BY: Lisa Harvey, CPA, CA Rotman School of Management, University of Toronto 1 CHAPTER 16 Appendix 16B Stock Compensation Plans- Additional Complications Kieso Weygandt Warfield Young Wiecek McConomy

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 Compensation is not based on share appreciation Criteria normally based on corporate performance Copyright John Wiley & Sons Canada, Ltd. 2

3. Stock Appreciation Rights (SARs) SARs designed to mitigate the complex process of exercising options and selling the related shares 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 a combination Copyright John Wiley & Sons Canada, Ltd. 3

4. Stock Appreciation Rights (SARs) The total amount of compensation is not known until the exercise date –This creates a measurement issue At the grant date/measurement date, an estimate must be made –IFRS requires the use of an options pricing model –ASPE requires the intrinsic value method The cost is then allocated over the service period using the percentage approach Copyright John Wiley & Sons Canada, Ltd. 4

5. Stock Appreciation Rights (SARs) Problem occurs when exercise date goes beyond service period –Any changes are reported in subsequent periods until rights expire or when exercised, whichever comes first Compensation expense adjusted whenever the fair value of the SARs changes –However, cumulative compensation expense can never have a negative value Copyright John Wiley & Sons Canada, Ltd. 5

6. Stock Appreciation Rights (SARs) - Example Given: SAR program established: January 1, 2015 SAR exercise period: any time during next five years Pre-established price per SAR: $10 (paid in cash) Number of SARs granted: 10,000 SAR’s fair value: Dec 31, 2015: $30,000; Dec 31, 2016: $70,000; Dec 31, 2014: $50,000 Service period: 2 years (2015 - 2016) The SARs are held for 3 years, then exercised Determine the compensation expense for 2015, 2016 and 2017 Copyright John Wiley & Sons Canada, Ltd. 6

7. Stock Appreciation Rights (SARs) - Example Copyright John Wiley & Sons Canada, Ltd. 7 Date Fair Value PercentageCumulative Compensation Dec 31 st of SAR Accrued Accrued to Date 2015 $30,000 50% $30,000 / 2 = $15,000 2016 $70,000 100% $70,000 - $15,000 = $55,000 2017 $50,000 100% * $50,000 - $70,000 = ($20,000) *Exercise date occurs before rights expiry date, final adjustment required in 2017

8. Stock Appreciation Rights (SARs) - Example Copyright John Wiley & Sons Canada, Ltd. 8 Dec 31, 2015Compensation Expense 15,000 Liability under SARs Plan15,000 Dec 31, 2016Compensation Expense 55,000 Liability under SARs Plan55,000 Dec 31, 2017Liability under SARs Plan 20,000 Compensation Expense20,000 Dec 31, 2017Liability under SARs 50,000 Cash50,000 (SARs exercised end of the third year)

9. Stock Appreciation Rights (SARs) SARs can be settled in cash or shares –Under ASPE, SARs that require equity settlement are presented as equity and are measured using the intrinsic value method or other valuation technique –Under IFRS, equity-settled SARs are presented as contributed surplus and are measured using an options pricing model Copyright John Wiley & Sons Canada, Ltd. 9

10. Performance-Type Plans Designed to separate market behavior from executive performance measurement Examples of performance measurement criteria might include: –Increases in ROA or ROE –EPS growth Measurement date is the date of exercise Compensation cost is estimated and allocated to periods involved using the percentage approach Copyright John Wiley & Sons Canada, Ltd. 10

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