Share-Based Compensation and Earnings Per Share

1. Share-Based Compensationand Earnings Per Share Chapter 19

2. Share-Based Compensation Stock Award Plans • Compensation: • Salary • Stock awards • Restricted stock plans • Usually tied to continuing employment. • Compensation is market price at date of grant. • Compensation expense accrued over service period.

3. Stock Option Plans Stock 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).

4. Earnings Per Share (EPS) Of the myriad facts and figures generated by accountants, the single accounting number that is reported most frequently in the media and receives by far the most attention by investors and creditors is earnings per share.

5. Net income (after tax) – Preferred dividends* Weighted-average outstanding common stock Number of shares outstanding× Number of months outstanding ÷ 12 Weighted-average shares outstanding Basic Earnings Per Share Simple Capital Structure (Basic EPS) *Currentperiod’s cumulative preferred stock dividends (whether or not declared) and noncumulative preferred stock dividends (only if declared).

6. 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. Stock Dividends and Stock Splits

7. Net incomeLess: Current period’s cumulative preferred stock dividends (whether or not declared)Less: Noncumulative preferred stock dividends (only if declared)Net income available to common shareholders Earnings Available toCommon Shareholders

8. Diluted Earnings Per Share Complex Capital Structure (dual EPS) • Potential Common Shares • Stock options, rights, and warrants • Convertible bonds and stock • Contingent common stock issues StockOptions Convertible securities Contingently issuable shares Treasury stock method If-converted method Dilution/Antidilution Test May Report Basic and Diluted Earnings Per Share

9. Options, Rights, and Warrants The treasury stock method assumes that proceeds from the exercise of options are used to purchase treasury shares. This method usually results in a net increase in shares included in the denominator of the calculation of diluted earnings per share. Proceeds At average market price Used to Purchase treasury shares

10. The if-converted method is used for convertible debt and equity securities. The method assumes conversion occurs as of the beginning of the period or date ofissuance, if later. Convertible Securities

11. Summary

12. Financial Statement Presentation • Report EPS data separately for: • Income from Continuing Operations • Separately Reported Items • Discontinued Operations • Extraordinary Items • Net Income

13. End of Chapter 19