Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Share-Based Compensationand Earnings Per Share

Chapter 19

19-2

Share-Based Compensation

Compensation: Salary Stock awards

Stock Award Plans

Restricted stock plans Usually tied to continuing employment. Compensation is market price at date of grant. Compensation expense accrued over service period.

19-3

Stock Option PlansStock option plans give employees the option to buy

a specified number of shares of the firm's stock,

at a specified exercise price, during a specified period of time.

The fair value is accrued as compensation expense over the service period for which participants receive the options, usually from the date of grant to when the options become exercisable (the vesting date).

19-4

Earnings Per Share (EPS)

Of the myriad facts and figures Of the myriad facts and figures generated by accountants, the single generated by accountants, the single

accounting number that is reported most accounting number that is reported most frequently in the media and receives by frequently in the media and receives by far the most attention by investors and far the most attention by investors and

creditors is creditors is earnings per shareearnings per share..

19-5

Simple Capital Structure(Basic EPS)

Basic Earnings Per Share

Net income (after tax) – Preferred dividends* Weighted-average outstanding common stock

Net income (after tax) – Preferred dividends* Weighted-average outstanding common stock

*Current period’s cumulative preferred stock dividends (whether period’s cumulative preferred stock dividends (whether or not declared) and noncumulative preferred stock dividends or not declared) and noncumulative preferred stock dividends

(only if declared).(only if declared).

*Current period’s cumulative preferred stock dividends (whether period’s cumulative preferred stock dividends (whether or not declared) and noncumulative preferred stock dividends or not declared) and noncumulative preferred stock dividends

(only if declared).(only if declared).

Number of shares outstanding× Number of months outstanding ÷ 12 Weighted-average shares outstanding

Number of shares outstanding× Number of months outstanding ÷ 12 Weighted-average shares outstanding

19-6

Stock Dividends and Stock Splits

Common shares issued as part of stock dividends and stock splits

are treated retroactively as subdivisions of the shares already outstanding at the date of the split

or dividend.

Common shares issued as part of stock dividends and stock splits

are treated retroactively as subdivisions of the shares already outstanding at the date of the split

or dividend.

19-7

Earnings Available toCommon Shareholders

19-8

Complex Capital StructureComplex Capital Structure(dual EPS)(dual EPS)

Dilution/Antidilution TestDilution/Antidilution Test

StockStockOptionsOptions

Convertible Convertible securitiessecurities

Treasury stock Treasury stock methodmethod

If-converted If-converted methodmethod

Contingently Contingently issuable issuable sharesshares

Potential Common Shares Stock options, rights, and warrants Convertible bonds and stock Contingent common stock issues

Potential Common Shares Stock options, rights, and warrants Convertible bonds and stock Contingent common stock issues

Diluted Earnings Per Share

May Report Basic and Diluted Earnings Per Share

19-9

Options, Rights, and Warrants

ProceedsProceeds

Used toUsed to

Purchase Purchase treasury treasury sharesshares

At At average average market market priceprice

The The treasury stock method assumes that proceeds assumes that proceeds

from the exercise of from the exercise of options are used to options are used to

purchase treasury shares. purchase treasury shares. This method usually This method usually

results in a net increase in results in a net increase in shares included in the shares included in the

denominator of the denominator of the calculation of diluted calculation of diluted earnings per share.earnings per share.

The The treasury stock method assumes that proceeds assumes that proceeds

from the exercise of from the exercise of options are used to options are used to

purchase treasury shares. purchase treasury shares. This method usually This method usually

results in a net increase in results in a net increase in shares included in the shares included in the

denominator of the denominator of the calculation of diluted calculation of diluted earnings per share.earnings per share.

19-10

Convertible Securities

The The if-converted method if-converted method is used for is used for convertible debt and equity convertible debt and equity

securities.securities.

The method assumes conversion The method assumes conversion occurs as of the occurs as of the beginningbeginning of the of the

period or date ofperiod or date of issuanceissuance, if later. , if later.

19-11

Summary

19-12

Financial Statement Presentation

Report EPS data separately for:

1. Income from Continuing Operations

2. Separately Reported Items

a) Discontinued Operations

b) Extraordinary Items

3. Net Income

19-13

End of Chapter 19