Many companies offer stock to employees. If stock is available to all employees and may be purchased for at least 95% of its market value, then accountants need not record the discount portion of the employee compensation. The stock’s worth will not be considered as an additional wage or compensation expense when calculating net income.
However, specific accounting rules must be applied when top management are rewarded with stock. This may occur when performance targets are met. They may be granted stock, stock options or stock appreciation rights. As a result, the accountant must record the amount as an additional wage or compensation expense.
Stock Issued to Employees
- Stock Options: The employee can purchase the stock at a set price- the option price. Typically, if the stock price in the open market is more than the option price, the stock option will be utilized. Stock options usually have an expiration date as well.
- Stock Appreciation Rights: The employee with stock appreciation rights can acquire appreciation beyond some base value. They may chose to receive this compensation in either cash or stock. Stock appreciate rights also have an expiration date.
When accounting for the stock issued to employees that is considered compensation, then the fair value method must be used. The compensation cost used is the market value of the stock. The measured compensation cost must be matched to the year the employee’s services were rewarded with the stock options.
Restricted or pseudo shares are sometimes rewarded to employees as well which means they may only be resold to other employees. If the holder’s job is terminated, typcially he is required to resell his shares to the company. When calculating the market value, the accountant must estimate its market value using techniques developed by financial analysts. The estimate then becomes the “market value” used in further accounting records.