Intermediate Financial
Accounting
Stock-Based
Compensation Plans
Stock-Based Compensation Plans

Examples of Stock–Based Compensation
Plans:

Stock Award Plans – Restricted Stock

Employee Stock Option (ESO) Plans

Stock Appreciation Rights (SAR)

Employee Stock Purchase Plans (ESPP)
Stock-Based Compensation Plans
2
Common Goal and Accounting for These
Plans


Employers’ Goal of these plans: to provide
performance-based compensation to
employees.
Accounting treatment:
1) to determine the fair value of the
compensation, and
2) to expense this compensation over the
vesting period of the compensation.
Stock-Based Compensation Plans
3
Stock Award Plans

A grant of shares of stock to executives
with some restrictions:
1)conditioned on continuing employment;
2)subject to forfeiture if employment is
terminated before shares are vested;
3)cannot be sold before shares are
vested.
Stock-Based Compensation Plans
4
Stock Award Plans (contd.)




These restrictions provide the employees
incentive to remain with the company until
the restrictions are lifted.
Fair value of the restricted stock award:
the market value of the same stock
(unrestricted) at the grant date.
The value is accrued as compensation
expense over the vesting period (from the
grant date to the date the restrictions lifted).
Stock-Based Compensation Plans
5
Stock Award Plans -Example

Maple Co. grants one million of its $1 par
common shares to its top five executives
on 1/1/20x5. The shares are subject to
forfeiture if employment is terminated
within three years. Similar shares
(unrestricted) have a current market price
of $30 per share.
Stock-Based Compensation Plans
6
Stock Award Plans -Example (contd.)



1/1/20x5: No entry. The total fair value of
the restricted shares is: $30 x1 million=
$30 million.
$30 million compensation is to be
allocated to expense over the vesting
period of 20x5-20x7.
The annual allocated stock award plan
compensation expense is: $30/3=$10
million.
Stock-Based Compensation Plans
7
Stock Award Plans –Example (cont.)



J.E. for 12/31/20x5, 20x6 and 20x7 ($in millions):*
Compensation Expense
Paid-in Capital –restricted stock
10
10
J.E. on12/31/20x7 (when restrictions are lifted):
Paid-in Capital-restricted stock
Common stock ($1 par)
Paid-in capital –in excess of par
30
1
29
* any market price changes after the grant date would not
affect the compensation expense.
Stock-Based Compensation Plans
8
Stock Award Plans – Example with
forfeiture

Assumed that 20% of the restricted shares
are forfeited on 3/5/20x7 due to termination
of employment, related entries would be
reversed:
($in millions)
Paid-in capital – restricted stock
4
Compensation expense
4
to reverse 20% of comp. expense recog. in 20x5 and 20x6
12/31/20x7(to record comp. exp. of 20x7)
Compensation expense
8
Paid-in Capital-restricted stock
Stock-Based Compensation Plans
8
9
Stock Award Plans – the tax issue


The stock award plans are usually
designed to comply with IRS codes to
allow tax defer for the recipients until the
shares are vested (i.e., when restrictions
are lifted).
Likewise, companies receive no tax
deduction of the compensation expense
until the recipients are taxed for the stock
award.
Stock-Based Compensation Plans
10
Employee Stock Option Plans


Corporations have programs that enable
employees to acquire shares of stock,
often at a price equal or less than the
current market price.
These programs involve the issuance of
options (rights) to the employees and are
referred to as employee stock option
(ESO) plans.
Stock-Based Compensation Plans
11
ESO Plans (contd.)
Non compensatory ESO Plans:
This is a plan to raise capital or to obtain
widespread employee ownership of the
corporate stock rather than to provide
additional compensation for certain
employees.
 The following characteristics are essential
for a stock option plan to be qualified as
“noncompensatory”:

Stock-Based Compensation Plans
12
ESO Plans:(contd.)
1. All
full time are employees who meet
limited employment qualification are able
to participate in the plan.
2. Stock is offered on an equal basis or an a
basis related to a uniform percentage of
salaries.
3. The exercise period is reasonable.
4. The discount is not greater than what
would be in an offer of stock to
stockholders.
Stock-Based Compensation Plans
13
ESO Plans:(contd.)
If all four are met, no journal entry is
required to recognize the value of the
plan as compensation expense
because no compensation is
considered to be paid.
 A memo is required.

Stock-Based Compensation Plans
14
Compensatory ESO Plans


An ESO plan does not have all four
characteristics listed in the preview
section is a compensatory plan.
A compensatory stock option plan is to
provide additional compensation to
employees.
Stock-Based Compensation Plans
15
The Value of ESO


This additional compensation is
represented by the realized value of the
ESO.
This realized value of ESO is the
difference between the amount of
proceeds received from the employees’
exercise of stock options and the amount
of the proceeds which the corporation
could receive if the stock were issued on
the open market.
Stock-Based Compensation Plans
16
The Value of ESO (contd.)



This realized value of the ESO will not
be known until the exercise date of the
options.
However, this value is needed for the
recognition of compensation expense
during the vesting period.
As a result, this value of ESO needs to
be estimated, usually, on the grant date
of the options.
Stock-Based Compensation Plans
17
The Estimation of ESO Value: the Intrinsic
Value method vs. the Fair Value Method
 The Intrinsic Value Method (adopted by
APB 25): the value of the ESO is the

excess of the market value of the share
over the exercise price on the
measurement date.*
The Fair Value Method (recommended
by SFAS 123 and adopted by SFAS 123
(R)) : the value of ESO is estimated based
on an option pricing model.
*The date when both the exercise price and the number of
options granted are first known which is usually the grant
Stock-Based Compensation Plans
18
Total Deferred Compensation Cost
of the ESO
 The total additional compensation cost
represented by the granted ESO is the
per share value of the ESO times the total
numbers of options granted.
 This total deferred compensation cost is
amortized and recognized as an expense
over the vesting period.*
*The service period required for the option to be
vested (i.e., from the grant date to the first date in
which options can be exercised.
Stock-Based Compensation Plans
19
Compensatory ESO Plans – An Example
Using the Intrinsic Value Method



Assume that on 12/31/x2, a corporation
grants A. Paul the nontransferable right to
acquire 1,000 shares of $10 par common
stock for $27 per share.
The market price on the date (12/31/x2) is
$29 per share, and the service period is 4
years.
The stock option may not be exercised until
the service period expired and the rights
terminate at the end of 7 years or if Paul
leaves the corporation.
Stock-Based Compensation Plans
20
Intrinsic Value Method Example (Contd.)

J.E.
12/31/x3 Compensation expense
Paid-in capital- ESO
500 a
500
a. ($29-27) x 1,000 = $2,000; $2,000/4 = $500
The compensation expense is also recognized for
x4,x5 and x6 service years:
J.E. for 12/31/x4,x5 and x6:
Compensation Expense
Paid-in capital –ESO
500
Stock-Based Compensation Plans
500
21
Intrinsic Value Method Example (Contd.)

When the options are exercised on 3/6/x8, the
following J.E is recorded:
Cash ($27 * 1,000)
27,000
Paid-in capital-ESO
2,000
Common Stock ($10*1,000)
10,000
Additional Paid-in Capital
19,000
 Disclosure on the Balance Sheet (Year x3):
Contributed Capital:
paid-in Capital-ESO
500
Stock-Based Compensation Plans
22
Intrinsic Value Method Example (Contd.)
If 500 shares of vested stock options were
expired (due to market price fall below the
exercise price) on 1/1/x9, the following entry
will be recorded:
Paid-in capital-ESO
1,000
Paid-in capital from
expired options
1,000
 Note: when stock options expired, the
previously recognized compensation
expense is not adjusted.

Stock-Based Compensation Plans
23
Intrinsic Value Method Example (Contd.)
If options are forfeited because an employee
fails to satisfy a service requirement (i.e.,
leaves employment), the related entry is
reversed as:
 Paid-in capital – ESO
$$$*
Compensation expense
$$$
* $$$ = The value of the forfeited options
recognized in previous years.

Stock-Based Compensation Plans
24
Intrinsic Value Method Example (Contd.)

The remaining ESO compensation cost
(subtracting the value of forfeited options)
would be allocated over the remaining
service (vesting) period.
Stock-Based Compensation Plans
25
The Fair Value Method (SFAS No. 123):
Effective for fiscal year beg. after 12/15/1995
 Under the intrinsic value method, when
setting the option price equals the market
price of the stock on the grant date, the
intrinsic value of the option would be zero.
 Thus, companies can avoid the
recognition of compensation expense by
setting the option price equals the market
price.
Stock-Based Compensation Plans
26
The Fair Value Method (SFAS 123)
 Based on available stock option pricing
models, the fair value of ESO can be
estimated on the grant date.
 Factors needed for the option pricing
model: exercise price, expected term of
the option (the time value), current
market price of the stock, expected
dividends, expected risk-free rate and
expected volatility of the stock.
Stock-Based Compensation Plans
27
The Fair Value Method (SFAS 123)
(contd.)


Using the fair value method, the fair value
of ESO is estimated based on an option
pricing model and would be allocated over
the vesting period. The journal entries are
similar to those of the intrinsic value
method as follows:
Compensation Expense xxx
Paid in capital – ESO xxxx
Stock-Based Compensation Plans
28
The Exercise, the Expiration and the Forfeitures
of Vested ESO under the Fair Value Method



The treatment for the exercise of ESO is the
same as that of the intrinsic value method on
p22.
The treatment of the expired vested ESO is
the same as that of the intrinsic value meth.
on p23.
The treatment of the forfeitures of ESO is the
same as that of the intrinsic value method on
p24 and p25.
Stock-Based Compensation Plans
29
The Fair Value Method


Using the fair value method, the estimated
compensation cost is not calculated as the
difference between the option price and
the market price of shares on the grant
date. Rather, it is based on an option
pricing model.
Thus, the option value would not be zero
even setting the option price equals the
market value on the grant date.
Stock-Based Compensation Plans
30
The Emergence of the Fair Value
Method in the Early 1990s


The public began to be more aware of
the executive compensation in the form
of stock options at the beginning of
the1990s.
It is apparent that under the intrinsic
value method, the ESO compensation
expense is undervalued ,and therefore,
under-expensed.
Stock-Based Compensation Plans
31
The Emergence of the Fair Value
Method (cont.)


With the encouragement from both
the SEC and the Congress, the
FASB moved forward with its stock
option project.
The FASB issued the Exposure Draft
requiring the fair value method for the
ESO accounting in 1993.
Stock-Based Compensation Plans
32
The Emergence of the Fair Value
Method (cont.)


The FASB encountered strong
opposition toward the fair value method
on ESO from many sectors of the
society (i.e., the corp. executives, the
auditors, members of the Congress, the
SEC, etc.).
The main objection reasons provided
by the critics iuclude:
Stock-Based Compensation Plans
33
The Emergence of the Fair Value
Method (cont.)




1. ESO with no intrinsic value should
have no fair value;
2. It is impossible to estimate the fair
value of ESO;
3. The fair value method would have
unacceptable economic consequences.
Note: The fair value method does not have any cash
flow impact.
Stock-Based Compensation Plans
34
The Emergence of the Fair Value
Method (cont.)


As a result of the strong opposition, the
FASB modified its position on the fair
value method.
Under the pressure, the FASB allowed
companies to choose between the
intrinsic value method and the fair value
method to account for the ESO
compensation expense in SFAS 123.
Stock-Based Compensation Plans
35
SFAS 123- Accounting for Stock-Based
Compensation


SFAS 123, however, requires
companies which choose the intrinsic
value method disclose the pro-forma
net income and earnings per share as if
the fair value method were used.
Note: SFAS 123 was issued in 10/1995 and
effective for fiscal year begninning after
12/15/1995.
Stock-Based Compensation Plans
36
SFAS 123 ( R ) (issued in 2004 and effective
for fiscal year beginning after 6/15/2005



SFAS 123 (Revised 2004) mandates
companies to use the fair value method to
account for ESO expense.
The intrinsic value method is eliminated
by SFAS 123 (R).
Prior to 2002, only two companies
volunteered to expense ESO
compensation at the fair value method
Stock-Based Compensation Plans
37
The Emergence of the SFAS 123 ( R )

The accounting scandals (i.e., fraudulent
reports) of the high-profile companies
lead to some degree of public
consensus that the greed of the
executives is a contributing factor to
those misleading reports.
Stock-Based Compensation Plans
38
The Emergence of the SFAS 123 ( R )


With the proliferation of stock options
granted to executives, the executives
have more incentive to produce fraudulent
reports to increase their stock price.
When stock price is increased, the
executives’ compensation would also be
increased from exercising their stock
options.
Stock-Based Compensation Plans
39
The Emergence of the SFAS 123( R )

Thus, not expensing the ESO cost
based on the fair value may have
contributed to the earnings inflation.
Stock-Based Compensation Plans
40
The Emergence of the SFAS 123 ( R )


With this renewed interest in expensing
the employee stock option at the fair value
from the public, the FASB proposed and
issued SFAS 123 (R) in 2004 to require
the expense of employee stock option at
the fair value, eliminating the intrinsic
value method.
By the end of 2004, hundreds of firms
were voluntarily expensing ESO at the fair
Stock-Based Compensation Plans
41
value.
Fair Value Method and Backdating of
Employee Stock Options


Had the fair value method been required,
it may have reduced (not eliminated) the
magnitude of option backdating.
This is because the fair value method
would require companies to recognize
compensation expense even if setting the
option price equals the market price on the
grant date.
Stock-Based Compensation Plans
42
Incentive Stock Option Plans Vs.
Non-qualified stock option plans-tax issues
A compensatory option plan can be an
incentive stock option plan or a nonqualified stock option plan based on the
IRS code.
 Under an Incentive Stock Option Plan:
The employee neither pay tax on the
grant date nor on the exercise date of
the options. The employee defers the

tax payment until shares acquired
through the ESO are subsequently
sold.
Stock-Based Compensation Plans
43
Incentive Stock Option Plans- tax issues
 The company which grants the
options gets no tax deduction at all.
 To qualify as the incentive plan under
the Tax Code, one important
requirement is that the option price
has to be equal to the market price on
the grant date.

Stock-Based Compensation Plans
44
Advantages of Setting Exercise Price
Equals the Market Value


Avoid expensing the compensation
cost if the intrinsic value method is
adopted; and
qualify as an incentive plan for tax
purposes.
Stock-Based Compensation Plans
45
Non-qualified stock option plans-tax issues
 Under a Non-qualified Stock Option Plan:
The option price can be set to below the
market price on the grant date. The
employee has to pay tax on the exercise
date when exercise price is less than the
market price on the exercise date (i.e., no
tax defer).
The company can deduct the difference
between the exercise price and the market
price on the exercise date for tax purposes.
Stock-Based Compensation Plans
46
Why Do Companies Offer Incentive Option
Plans ?
 Since the non-qualified stock option plan
favors the company for tax purposes,
why would some companies structure
the plans as incentive plans?
Stock-Based Compensation Plans
47
Why Do Companies Offer Incentive Option
Plans ?
 Two possible reasons:
 No recognition of compensation expense
since option price sets to equal the
market price under the incentive plan
(only when the intrinsic value method is
allowed)
 The favorable tax treatment for the
recipients of options under the incentive
plan can better attract and retain quality
employees than the non-qualified plan.
Stock-Based Compensation Plans
48
Tax Consequences of Stock-Based
Compensation Plans-the Incentive Plan
 For the incentive plan, the companies
receive no tax deductions at the
exercise date.
 Thus, there is no tax consequences
for the companies under the incentive
stock option plan.
Stock-Based Compensation Plans
49
Tax Consequences of Stock-Based
Compensation Plans-the non-qualified plan
 For the non-qualified stock option
plan, the companies will receive tax
deductions on the exercise date for
the difference between the option
price and the market price on the
exercise date.
 Thus, there would be tax
consequences for the non-qualified
plan.
Stock-Based Compensation Plans
50
Tax Consequences of Stock-Based
Compensation Plans –the non-qualified plan
(contd.)
 Since the compensation expense1
is allocated over the service period
starting the granting year while the
tax deduction2 is not allowed until
the exercise date, this will create a
temporary difference between
accounting income and taxable
income.
Stock-Based Compensation Plans
51
Tax Consequences of Stock-Based
Compensation Plans –the non-qualified plan
(contd.)
1.The difference between the option
price and the market price on the grant
date.
2. the difference between the option
price and the market price on the
exercise date.
Stock-Based Compensation Plans
52
Tax Consequences of Stock-Based
Compensation Plans –the non-qualified plan
exapmle
 use the information on page 20 except that the
company adopts the fair value method. The
estimated fair value of the option per share equals
$4 using an option pricing model. Also, assume a
tax rate of 40%. The following entries will be
recorded for x3,x4,x5 and x6:
Compensation expense
1,0001
Paid-in capital-stock options
1,000
Deferred tax asset
400
Income tax expense
400
1. $4*1,000 /4 service years= $1,000
Stock-Based Compensation Plans
53
Tax Consequences of Stock-Based
Compensation Plans –the non-qualified plan
exapmle (contd.)
When all options are exercised in March of x8, and the
market price is $33 per share, the following entries
are recorded:
Cash ($27 * 1,000)
27,000
Paid-in capital-stock options
4,000
Common Stock ($10*1,000)
10,000
Additional Paid-in Capital
21,000
Income tax payable
2,400
Deferred tax asset
Paid in capital-tax effect
on stock options
Stock-Based Compensation Plans
1,600
800
54
Tax Consequences of Stock-Based
Compensation Plans –the non-qualified plan
exapmle (contd.)
When all options are exercised in March of x8, and the
market price is $30 per share, the following entries
are recorded:
Cash ($27 * 1,000)
27,000
Paid-in capital-stock options
4,000
Common Stock ($10*1,000)
10,000
Additional Paid-in Capital
21,000
Income tax payable
1,200
Income tax expense
or paid-in capital-tax effect
400
Deferred tax asset
1,600
Stock-Based Compensation Plans
55
Plans with Performance on Market
Conditions


Conditions to vest an ESO are not limited to
the service years.
Other conditions could be:
Performance-based: certain performance
must be met (i.e., EPS increased by 10%;
sales growth 20% every year for three
years, etc.).
Market-based: stock price increased by
20% in three years.
Stock-Based Compensation Plans
56
Plans with Performance on Market
Conditions: accounting (contd.)



Recognition of the compensation exp. of
the performance-based depends on:
Initially on whether the performance
target could be met ;
Ultimately on whether the target is
actually met.
Stock-Based Compensation Plans
57
Plans with Performance on Market
Conditions: example I


Cgate Corp. estimated the ESO expense at a
fair value of $100 million with a 4-year vesting
period. For 20x5 and 20x6, Cgate recorded
the ESO expense based on the expectation
that the performance target can be achieved:
JE for 20x5 and 20x6 ($ in millions)
Compensation Expense
25
Paid-in Capital –Stock Options
25
In 20x7, the expectation is that it is not
probable to achieve the performance target:
Paid-in Capital –Stock options
50
Compensation Expense
50
Stock-Based Compensation Plans
58
Plans with Performance on Market
Conditions: example II


Cgate Corp. estimated the ESO expense at a
fair value of $100 million with a 4-year vesting
period. For 20x5 and 20x6, Cgate recorded
the ESO expense based on the expectation
that the performance target cannot be
achieved:
JE for 20x5 and 20x6:
($ in millions)
Compensation Expense
0
Paid-in Capital –Stock Options
0
Stock-Based Compensation Plans
59
Plans with Performance or Market
Conditions: example II (contd.)

In 20x7, the expectation is that it is probable to
achieve the performance target:
Compensation Expense
75*
Paid-in Capital – Stock Options
75
* $100 x ¾ - $0 = $75
Note: The cumulative effect on compensation is
reflected in 20x7 earnings, not as a prior period
adjustment.


The JE in 20x8 (no change in estimation):
Compensation Expense 25
Paid-in Capital-Stock Options
25
Stock-Based Compensation Plans
60
The Traditional ESO Plans vs.
Performance-based ESO Plans


For the traditional ESO plans, the fair
value of ESO is estimated at the grant
date and is allocated as comp. expense
over the vesting period.
The allocation of fair value is not affected
(or reversed) even if the expectation
(about whether the market price will
exceed the exercise to ensure the
exercise of the options) is changed.
Stock-Based Compensation Plans
61
The Traditional ESO Plans vs.
Performance-based ESO Plans (cont.)

For the performance-based plans, the
previously recognized compensation
expense and paid-in capital- ESO
would be reversed when the
expectation (about whether the
performance target can be achieved) is
changed.
Stock-Based Compensation Plans
62
The Traditional ESO Plans vs.
Performance-based ESO Plans (contd.)

If the vested traditional option becomes
worthless, the paid-in capital-stock
option is debited and paid-in capital
from expired option is credited, not the
compensation expense.
Stock-Based Compensation Plans
63
The Traditional ESO Plans vs.
Performance-based ESO Plans (contd.)

For the performance-based plans, if the
option expected to be worthless (i.e.,
expecting the target performance not
being met), the previously recognized
paid-in capital-stock option will be
debited and compensation expense will
be credited.
Stock-Based Compensation Plans
64
The Traditional ESO Plans vs.
Performance-based ESO Plans (contd.)
 Some companies favor the
performance-based ESO plans over the
traditional ESO plans due to its lower
compensation expense in the case of
performance target not being met.
Stock-Based Compensation Plans
65
Stock Appreciation Rights (SARs)


Under either incentive or the non-qualified
stock option plan, the employee has to
come up with cash to exercise the options
(and pay the tax under the non-qualified
option plan).
Stock Appreciation Rights (SARs) is a
creation to solve the cash problem for
employees with the stock-based
compensation.
Stock-Based Compensation Plans
66
The Stock Appreciation Rights(SARs)


The SARs are rights granted to key
employees that enable them to receive cash,
stock or a combination of both equal to the
share appreciation (i.e., the excess of the
market price on the exercise date over a prespecified price, usually the share price on
the grant date).
The value of SARs is estimated based on an
option pricing model.
Stock-Based Compensation Plans
67
The SARs: an Example
On 1/1/x4, when the market price is $10 per
share, a corp. grants 1,000 SARs to a key
executive, C. Talbert. Under the SARs Plan,
Talbert is entitled to receive cash or stock for
the difference between the market price at
exercise and a $10 for 1,000 shares of the
company stock on the date of exercise. The
service period is 4 years (x4-7) and the
rights must be exercised in 6 years (x8-9).
Stock-Based Compensation Plans
68
SAR Example (Contd.)

The year and fair values of SAR per share are shown in
Exhibit 1. Talbert exercises the rights to receive cash on
7/9/x8 when the stock price is $13.4 per share.
Date
12/31/x4
12/31/x5
12/31/x6
12/31/x7
7/19/x8
Fair
Value of
SAR
2
3
1.8
2.6
3.4
Accured
Esti. Total a
%
Total Comp. Comp. Exp.
Comp. Cost Accued Exp. to Date
to Date
b
2000
25%
500
3,000
50%
1,500
1,800
75%
1,350
2,600
100%
2,600
3,400
100%
3,400
Stock-Based Compensation Plans
Yearly
Comp.
Exp.
500
1,000
-150
1,250
800
3,400
69
Stock Appreciation Rights(SARs) (Contd.)
12/31/x4 Compensation Expense
500
Liability- SAR plan
500
12/31/x5 Compensation Expense
1,000
Liability – SAR plan
1,000
12/31/x6 Liability – SAR plan
150
Compensation Expense
150
12/31/x7 Compensation Expense
1,250
Liability – SAR plan
1,250
Note: a paid-in capital –SARs plan account should be
credited if Talbert can only elect to settle in shares at
exercise. When an equity account is credited, the fair value
of SARs is not reevaluated over the vesting period.
Stock-Based Compensation Plans
70
Stock Appreciation Rights(SARs) (Contd.)
Liability –SAR plan
500
200
1,000
1,300
2,600…. 12/31/x7
J.E. of 7/19/x8 when Talbert
exercises the option:
Comp. Expense
800
Liability –SAR plan
2,600
Cash
Stock-Based Compensation Plans
3,400
71
Employee Share Purchase Plans
(ESPP)

The employee share purchase plans
permit all employees to buy shares
directly from their companies at
favorable terms (i.e., no commissions or
at a discount, etc.).
Stock-Based Compensation Plans
72
Employee Share Purchase Plans
(ESPP)


If, a) substantially all employees
participate in the plan; b) employees have
no longer than one month to decide to
participate; and c) the discount is not
greater than 5%, the accounting treatment
for the ESPP is similar to the sale of
shares to employees.
This plan is a non-compensatory plan
and no compensation expense is
recognized by the employer.
Stock-Based Compensation Plans
73
Employee Share Purchase Plans
(contd.)


If the employers pay a portion of the
purchase price, the compensation expense
account is used for the portion of purchase
price paid by the employer. J.E. is as
follows:
Compensation Expense
Cash
Common Stock
Paid-in capital
$$ *
$$
$$
$$
*The portion of the purchase price paid by the employers.
Stock-Based Compensation Plans
74
Employee Share Purchase Plans


In case of discount is greater than 5%
(i.e., a 15% discount) and no reasonable
justification for this discount, the purchase
plan will be treated as a compensatory
plan.
The value of this 15% discount will be
recognized as compensation expense
when the employees purchase shares at
the 15% discount.
Stock-Based Compensation Plans
75