Stock compensation is a way for companies to pay employees in shares of stock or stock options. Stock options are the most common type of stock compensation and allow an employee to purchase the company's stock at a set price during a set vesting period. Accounting for stock compensation is significantly more complex than doing so for traditional compensation.
The company is required to properly value the stock or stock options and then make accounting entries to record stock compensation expense. 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: This represents when the date at which employee is compensated. The date at which, in a stock option plan, an employee can exercise their options to buy stock shares. 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. The date at which any remaining, unexercised options expire.
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. 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.
Non-public companies may use either method. Find the value of restricted stock. 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. Calculate stock option 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.
This calculation is typically handled by accounting or financial modeling software. Make an entry to record compensation. Original stock compensation is recorded according to when the stocks or options become vested available to the employee. The specifics of when this occurs are specific to individual employee stock compensation plans and are created at the discretion of the company.
The entries made on the vesting date s are a debit to Compensation Expense and a credit to Additional Paid-In Capital, Stock Options, both for the fair value of the vested options or stocks. For example, imagine that an employee is granted a stock option plan on the first day of that gives them the option to purchase 1, shares of stock after a 2-year vesting period.
All other entries for stock compensation plans will likely be made on the expiration date. Any exercised options will be recorded to reflect the increase in cash and change in common stock and options accounts. Continuing with the previous example, imagine that the employee decides to exercise of his options. This would mean that he buys shares of the stock at the option price. In addition, it would represent 40 percent of total of the stock options originally granted leaving the company.
However, this also means that the common stock shares created in the purchase must be recorded. This will be done at the par value. Write off expired options. At the expiration date, any unexercised options are also recorded.
In this case, having exercised 40 percent of their options over the vesting period, the employee has elected not to exercise the remaining 60 percent. Account for the employee stock-based compensation when completing your financial statements. How financial statements are presented is your prerogative, but you must include all stock-based compensation when distributing statements to your stockholders. Stock compensation should be recorded as an expense on the income statement.
However, stock compensation expenses must also be included on the company's balance sheet and statement of cash flows. Find your grant price. Determine the price at which you could purchase a share under the terms of your employee stock-based compensation plan. This is known as the par value or the grant price for stock options. Repeat this process for each "batch" of stock if you received stock-based compensation at different price points.
This information should be listed in your employment contract or can be found by contacting your HR department. This represents how much he or she would pay for a share, regardless of the current market price.
Calculate the difference between the grant price and market price at the exercise date. If you choose to exercise your options at any point, you need to record the full market value of the stock shares at the time at which you exercised the options.
This is because the difference between the market price and the grant date at the exercise date is taxable as income if you do not hold the stock for a long enough period of time. This period of time, generally one or two years, is determined by federal and state law and varies between states and options plans.
If you sell before the waiting period is over, you will be responsible for paying income tax on that difference. This would be calculated as your marginal tax rate times the total amount of the compensation. Determine capital gains on the sale of the stock. When you sell the stock provided by your stock compensation plan, you must pay capital gains on your returns from the sale.
These taxes are all that you will owe on your stock compensation gains if you have already reached the end of the required waiting period when you sell. Capital gains are determined as the difference between the market value at exercise and the market value at the selling date.
File your taxes properly. Make sure to disclose all capital gains and losses on your income taxes. You should also include any stock sold before the required waiting period.
Speak to a financial professional if you are unsure of when this waiting period ends. Failure to properly to report these gains can result in fines or criminal penalties. Already answered Not a question Bad question Other.
All text shared under a Creative Commons License. Help answer questions Learn more.More...