Standard V (B) – Communication with ...
Members and Candidates must: Disclose to clients and prospective clients the basic format... Read More
Share-based compensation is a way of paying company employees with shares from the business. It is a way of motivating employees beyond their regular salaries and bonuses, which are cash-based. It also aligns the employees’ interests with those of the shareholders. It includes stocks and stock options.
Under IFRS and US GAAP, a company needs to disclose its annual report vital elements of management compensation.
A compensation expense is reported during the period in which employees earn a salary. It is relatively straightforward to account for cash payments and bonuses.
Share-based compensation includes stock, phantom shares, stock appreciation rights, and stock options. Compensation expense for share-based compensation is reported as a fair value under US GAAP and IFRS.
However, the specifics of accounting depend on the type of share-based compensation. Both IFRS and US GAAP requires the following disclosures for share-based compensation:
Analysts may decide to analyze this line of the issue by:
Question
Which of the below statements is least likely accurate?
A. Share-based compensation aligns the interests of employees and shareholders.
B. Share-based compensation increases the number of shares outstanding and therefore decreases the future share price.
C. Companies do not need to recognize share-based compensation under US GAAP and IFRS.
Solution
The correct option is C.
Recognition of compensation expense for share-based compensation at fair value is a requirement under both US GAAP and IFRS to
A is incorrect. Share-based compensation refers to rewards that a company gives to its employees in terms of equity ownership rights intending to align the interests of shareholders and the company’s employees.
B is incorrect. Share-based compensation is treated as an expense, which implies a reduction in earnings. In addition to this, stock options have the potential to dilute earnings per share. Issuing share-based compensation increases the number of shares outstanding. What this means is that each existing stockholder owns a smaller, or diluted, percentage of the company, making each share less valuable.
Reading 12: Employment Compensation: Post-Employment and Share-Based
LOS 12 (g) Explain issues associated with accounting for share-based compensation.