{"id":10309,"date":"2023-02-26T09:02:51","date_gmt":"2023-02-26T09:02:51","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=10309"},"modified":"2025-12-18T16:01:17","modified_gmt":"2025-12-18T16:01:17","slug":"issues-associated-accounting-share-based-compensation","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/","title":{"rendered":"Issues Associated With Accounting for Share-based Compensation"},"content":{"rendered":"<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/qIEMq5H3QEI\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"Which of the below statements is least likely accurate?\",\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct option is C.\\n\\nRecognition of compensation expense for share-based compensation at fair value is a requirement under both US GAAP and IFRS.\"\r\n    },\r\n    \"suggestedAnswer\": [\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"A. Share-based compensation aligns the interests of employees and shareholders.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"B. Share-based compensation increases the number of shares outstanding and therefore decreases the future share price.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"C. Companies do not need to recognize share-based compensation under US GAAP and IFRS.\"\r\n      }\r\n    ],\r\n    \"answerCount\": 3\r\n  }\r\n}\r\n<\/script>\r\n\r\n\r\n<p>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\u2019 interests with those of the shareholders. It includes stocks and stock options.<\/p>\r\n<p>Under IFRS and US GAAP, a company needs to disclose its annual report vital elements of management compensation.<\/p>\r\n<h3>Advantages<\/h3>\r\n<ul>\r\n\t<li style=\"font-weight: 400;\">Requires no initial capital outlay.<\/li>\r\n\t<li style=\"font-weight: 400;\">Aligns the interests of employees and shareholders.<\/li>\r\n\t<li style=\"font-weight: 400;\">It can take different forms, those that are equity-settled and those that are cash-settled.<\/li>\r\n\t<li style=\"font-weight: 400;\">Creates an incentive for employees to stay at the company for longer.<\/li>\r\n<\/ul>\r\n<h3>Disadvantages<\/h3>\r\n<ul>\r\n\t<li style=\"font-weight: 400;\">It is treated as an expense and thus as a reduction in earnings even when no cash changes hands.<\/li>\r\n\t<li style=\"font-weight: 400;\">Stock options dilute earnings per share.<\/li>\r\n\t<li style=\"font-weight: 400;\">It does not necessarily provide the desired incentives since the recipient has limited influence over the company\u2019s market value.<\/li>\r\n\t<li style=\"font-weight: 400;\">Increasing ownership may lead managers to be risk-averse due to fear of a substantial decline in market value-driving them to seek managers to seek less risky projects.<\/li>\r\n\t<li style=\"font-weight: 400;\">In contrast, managers may seek more risky projects since options have skewed payouts that reward excessive risk-taking.<\/li>\r\n<\/ul>\r\n<p>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.<\/p>\r\n<p>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.<\/p>\r\n<p>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:<\/p>\r\n<ul>\r\n\t<li style=\"font-weight: 400;\">The nature and extent of share-based compensation arrangements during the period.<\/li>\r\n\t<li style=\"font-weight: 400;\">How the fair value of a share-based compensation arrangement was determined.<\/li>\r\n\t<li style=\"font-weight: 400;\">The effect of share-based compensation on the company\u2019s income for the period and on its financial position.<\/li>\r\n<\/ul>\r\n<h3>Implications in Financial Modelling and Analysis<\/h3>\r\n<p>While the compensation expense does not require any cash, it has an economic impact on the business as the number of shares outstanding increases.<\/p>\r\n<p>Analysts may decide to analyze this line of the issue by:<\/p>\r\n<ul>\r\n\t<li style=\"font-weight: 400;\">Treating the expense as a cash item (don\u2019t add it back).<\/li>\r\n\t<li style=\"font-weight: 400;\">Adding it back and increasing the number of shares outstanding by the number of shares awarded to employees (both vested and non-vested).<\/li>\r\n<\/ul>\r\n<blockquote>\r\n<h3>Question<\/h3>\r\n<p>Which of the below statements is <i>least likely <\/i>accurate?<\/p>\r\n<p>A. Share-based compensation aligns the interests of employees and shareholders.<\/p>\r\n<p>B. Share-based compensation increases the number of shares outstanding and therefore decreases the future share price.<\/p>\r\n<p>C. Companies do not need to recognize share-based compensation under US GAAP and IFRS.<\/p>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct option is C<\/strong>.<\/p>\r\n<p>Recognition of compensation expense for share-based compensation at fair value is a requirement under both US GAAP and IFRS to\u00a0<\/p>\r\n<p><strong>A is incorrect<\/strong>. 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&#8217;s employees.<\/p>\r\n<p><strong>B is incorrect<\/strong>.\u00a0Share-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.<\/p>\r\n<\/blockquote>\r\n<p>Reading 12: Employment Compensation: Post-Employment and Share-Based<\/p>\r\n<p><em>LOS 12 (g) Explain issues associated with accounting for share-based compensation.<\/em><\/p>","protected":false},"excerpt":{"rendered":"<p>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\u2019 interests with those of the&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,312],"tags":[216,313,226],"class_list":["post-10309","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-financial-reporting-and-analysis-fra","tag-cfa-level-2","tag-financial-reporting-and-analysis-fra","tag-issues-associated-with-accounting-for-share-based-compensation","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Issues Associated With Accounting for Share-based Compensation - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Issues Associated With Accounting for Share-based Compensation - CFA, FRM, and Actuarial Exams Study Notes\" \/>\n<meta property=\"og:description\" content=\"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\u2019 interests with those of the...\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/\" \/>\n<meta property=\"og:site_name\" content=\"CFA, FRM, and Actuarial Exams Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2023-02-26T09:02:51+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-12-18T16:01:17+00:00\" \/>\n<meta name=\"author\" content=\"Irene R\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Irene R\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/\"},\"author\":{\"name\":\"Irene R\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/7002f30d8f174958802c1c30b167eaf5\"},\"headline\":\"Issues Associated With Accounting for Share-based Compensation\",\"datePublished\":\"2023-02-26T09:02:51+00:00\",\"dateModified\":\"2025-12-18T16:01:17+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/\"},\"wordCount\":579,\"keywords\":[\"CFA-level-2\",\"Financial Reporting and Analysis (FRA)\",\"Issues Associated with Accounting for Share-Based Compensation\"],\"articleSection\":[\"CFA Level II Study Notes\",\"Financial Reporting and Analysis (FRA)\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/\",\"url\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/\",\"name\":\"Issues Associated With Accounting for Share-based Compensation - CFA, FRM, and Actuarial Exams Study Notes\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/study-notes\/#website\"},\"datePublished\":\"2023-02-26T09:02:51+00:00\",\"dateModified\":\"2025-12-18T16:01:17+00:00\",\"author\":{\"@id\":\"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/7002f30d8f174958802c1c30b167eaf5\"},\"breadcrumb\":{\"@id\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/analystprep.com\/study-notes\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Issues Associated With Accounting for Share-based Compensation\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/#website\",\"url\":\"https:\/\/analystprep.com\/study-notes\/\",\"name\":\"CFA, FRM, and Actuarial Exams Study Notes\",\"description\":\"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/analystprep.com\/study-notes\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/7002f30d8f174958802c1c30b167eaf5\",\"name\":\"Irene R\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g\",\"caption\":\"Irene R\"},\"url\":\"https:\/\/analystprep.com\/study-notes\/author\/irene\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/qIEMq5H3QEI\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"3469\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2023-02-26T09:02:51+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Issues Associated With Accounting for Share-based Compensation - CFA, FRM, and Actuarial Exams Study Notes","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/","og_locale":"en_US","og_type":"article","og_title":"Issues Associated With Accounting for Share-based Compensation - CFA, FRM, and Actuarial Exams Study Notes","og_description":"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\u2019 interests with those of the...","og_url":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/","og_site_name":"CFA, FRM, and Actuarial Exams Study Notes","article_published_time":"2023-02-26T09:02:51+00:00","article_modified_time":"2025-12-18T16:01:17+00:00","author":"Irene R","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Irene R","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/"},"author":{"name":"Irene R","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/7002f30d8f174958802c1c30b167eaf5"},"headline":"Issues Associated With Accounting for Share-based Compensation","datePublished":"2023-02-26T09:02:51+00:00","dateModified":"2025-12-18T16:01:17+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/"},"wordCount":579,"keywords":["CFA-level-2","Financial Reporting and Analysis (FRA)","Issues Associated with Accounting for Share-Based Compensation"],"articleSection":["CFA Level II Study Notes","Financial Reporting and Analysis (FRA)"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/","url":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/","name":"Issues Associated With Accounting for Share-based Compensation - CFA, FRM, and Actuarial Exams Study Notes","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/#website"},"datePublished":"2023-02-26T09:02:51+00:00","dateModified":"2025-12-18T16:01:17+00:00","author":{"@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/7002f30d8f174958802c1c30b167eaf5"},"breadcrumb":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/issues-associated-accounting-share-based-compensation\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/study-notes\/"},{"@type":"ListItem","position":2,"name":"Issues Associated With Accounting for Share-based Compensation"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/study-notes\/#website","url":"https:\/\/analystprep.com\/study-notes\/","name":"CFA, FRM, and Actuarial Exams Study Notes","description":"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/study-notes\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/7002f30d8f174958802c1c30b167eaf5","name":"Irene R","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g","caption":"Irene R"},"url":"https:\/\/analystprep.com\/study-notes\/author\/irene\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/qIEMq5H3QEI","og_video_type":"text\/html","og_video_duration":"3469","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2023-02-26T09:02:51+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/10309","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/comments?post=10309"}],"version-history":[{"count":18,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/10309\/revisions"}],"predecessor-version":[{"id":41479,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/10309\/revisions\/41479"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/media?parent=10309"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/categories?post=10309"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/tags?post=10309"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}