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When thinking about how to attract and retain the best talent, compensation is always at the forefront of an employer’s mind. Stock-based compensation is an effective idea to encourage employees to come work and stay with your Company. The benefit of providing employees with stock-based compensation is to give to employees without using cash, which is always a precious resource. When designing a stock-based compensation plan, there is frequently much focus on the tax, legal and human resource aspects.  However, the accounting treatment is often overlooked during the plan design phase.   

Typically, there are two types of stock that can be given to employees or executives, stock options and restricted stock. Stock options provide employees with the right, but not the obligation, to buy the Company’s stock at a predetermined strike price. Restricted stock typically requires the fulfillment of a condition, usually time. Under the generally accepted accounting principles (U.S. GAAP), stock compensation has special treatment that needs to be considered before implementation.  

Related to stock options, there is a compensation value that must be recorded by the Company. The determination of the value can be easily determinable for a public company as its stock is actively traded and available. As an example, assume that an employee has 100 stock options with an exercise price of $80 and the market value of the underlying stock is $100. The value of the compensation is the difference between the market price ($100) and the exercise price ($80), in this case, $20 per share. If the options vest, the Company would record a compensation expense of $2,000 at the time of vesting. Stock options are adjusted to fair value based on the market price. A calculation like this could require the use of the Black Scholes model, which uses different inputs to calculate the fair value. To record the stock-based compensation before the options are exercised, the Company would record a non-cash expense. Using the example above, the entry that would be recorded is as follows: 

Account Name Debit Credit
Stock Option Expense $2,000
Additional Paid in Capital – Stock Option Expense $2,000

Upon exercise of the option, the following entry would be made. Assume that the fair value of the stock has remained at $100. 

Account Name

Debit 

Credit

Cash 

$8,000 

 
Additional Paid in Capital – Stock Option Expense 

$2,000 

 
Common Stock ($1 par value)   

$100

Additional Paid in Capital   

$9,900

As it relates to restricted stock, typically an employee must reach a vesting date in the future. This serves to incentivize employees to remain with the Company. Restricted stock is also alluring to employees as there is no cash outlay made by the employees.  

Let’s use the same facts as the example above, but in this case, the employee will receive 100 shares over 5 years, vested ratably over the years (20 shares a year).  

To record the restricted stock shares when issues, the following journal entry is made 

Account Name

Debit

Credit

Contra Equity – Deferred Compensation 

$10,000 

 
Common Stock ($1 par value)  

$100

Additional Paid in Capital   

$9,900

At the end of year one the company will need to record the following entry.  

Account Name

Debit 

Credit 

Restricted Stock Expense 

$2,000 

 
Contra Equity – Deferred Compensation    

$2,000 

As the two examples illustrate, the type of stock-based compensation plan a Company uses can significantly impact the financial statement.  Further, the differences between the various types of plans should be considered when designing a stock-based compensation plan.  Contact your WilkinGuttenplan advisor to discuss any questions you may have regarding stock-based compensation plans. 

Questions? Ask a WG Advisor

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