Seventh Canadian Edition
KIESO, WEYGANDT, WARFIELD, YOUNG, WIECEK
Prepared by:
Gabriela H. Schneider, CMA
Northern Alberta Institute of Technology

Learning Objectives
14.
Account for stock appreciation rights plans
15.
Explain the nature of performance related plans

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

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

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
• Problem occurs when exercise date goes beyond service period

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

Stock Appreciation Rights
(SARs) - Example
Given:
• SAR program established: January 1, 2004
• 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, 04: $ 13; Dec 31, 05: $17; Dec 31, 06: $
15
• Service period: 2 years (2004 - 2005)
• The SARs are held for 3 years, then exercised
Determine the compensation expense for 2004, 2005, and
2006

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
2004 10,000 * ($13-$10)
= $ 30,000
50% $30,000 / 2
= $15,000
2005 10,000 * ($17-$10)
= $ 70,000
100% $ 70,000 - $15,000
= $55,000
2006 10,000 * ($15-$10)
= $ 50,000
100% *
*Exercise date occurs before rights expiry date, final adjustment required in 2006
$ 50,000 - $70,000
= ($20,000)
Journal Entries

Stock Appreciation Rights
(SARs) - Entries
Credit Debit
Dec 31, 2004 Compensation Expense 15,000
Liability under SARs 15,000
Dec 31, 2005 Compensation Expense 55,000
Liability under SARs
Dec 31, 2006 Liability under SARs
Compensation Expense
20,000
55,000
20,000
Dec 31, 2006 Liability under SARs
Cash
50,000
(SARs exercised end of the third year)
50,000

$
Stock Appreciation Rights
(SARs) - Example
Market Price
Compensation
Expense
12/31/04 12/31/05 12/31/06
The recorded cost of compensation is directly linked to the market performance of the stock, not executive performance

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

COPYRIGHT
Copyright © 2005 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.