PLANS WITH PERFORMANCE OR

MARKET CONDITIONS
The way we account for such plans depends on whether the condition is
performance-based or market-based.

Plans with Performance Conditions

 If compensation from a stock option depends on meeting a
performance target, then whether we record compensation
depends on whether or not we feel it’s probable the target will be
met.
 If the initial expectation is that it is not probable that the target
will be met, we record no annual compensation expense. If, after
two years, the expectation is that it is probable that the target will
be met, we record the cumulative effect on compensation in 2013
earnings and record compensation thereafter:

2013
Compensation expense ([$80 x ¾] - $0) .......... 60
Paid-in capital –stock options ................ 60
2014
Compensation expense ([$80 x 4/4] - $60) ...... 20
Paid-in capital –stock options ................ 20
Plans with Market Conditions
 If the award contains a market condition (e.g., a share option with
an exercisability requirement based on the stock price reaching a
specified level), then we recognize compensation expense
regardless of when, if ever, the market condition is met.

T19-8
 INTERNATIONAL FINANCIAL REPORTING
STANDARDS

Recognition of Deferred Tax Asset for Stock Options. Under

U.S. GAAP, a deferred tax asset is created for the cumulative
amount of the fair value of the options expensed. Under IFRS,
the deferred tax asset isn’t created until the award is “in the
money;” that is, has intrinsic value.

T19-9
EMPLOYEE SHARE PURCHASE PLANS
 PERMIT EMPLOYEES TO BUY SHARES DIRECTLY
FROM THEIR COMPANY.
 Usually the plan is considered compensatory, and
compensation expense is recorded.
 Assume an employee buys shares (no par) under an
ESPP plan for $850 rather than the current market
price of $1,000. The $150 discount is recorded as
compensation expense:

Cash (discounted price) 850

Compensation expense ($1,000 x 15%) 150
Common stock (market value) 1,000

T19-10
EARNINGS PER SHARE
 In the most basic setting, earnings per share is simply a
company’s earnings (or loss) divided by the number of
shares outstanding.

Sovran Metals Corporation reported net income of $154

million in 2011. (Its tax rate was 40%).

 Common stock
January 1, 2011 60 million shares outstanding

(in millions, except per share amount)

Basic EPS:
net
income
$154
= $2.57
60
shares
outstanding