Search within this section
Select a section below and enter your search term, or to search all click Stock-based compensation
Favorited Content
3.4 Illustration of a liability-classified award
Publication date: 29 Feb 2024
us Stock-based compensation guide
Example SC 3-10 illustrates the accounting for a common liability-classified award. For the sake of simplicity, long-term versus short-term classification of balance sheet amounts is not considered; quarterly information is not presented; nor is any of the compensation cost subject to capitalization under other GAAP.
Refer to TX 17 for guidance on the tax-related aspects of the examples.
EXAMPLE SC 3-10
Cash-settled SARs with service and performance conditions
Cash-settled SARs with service and performance conditions
On January 1, 20X1, SC Corporation, a calendar year-end company, grants 100,000 cash-settled SARs with service and performance conditions to five vice presidents (20,000 SARs each). The cash-settled SARs will cliff vest if each vice president’s department achieves a cumulative revenue total of $3 million over a three-year period that ends on December 31, 20X3 and the vice president is still employed at that date (i.e., the SARs have a performance condition with a three-year requisite service period). Historical results lead management to believe that the targets will be achieved and that none of the vice presidents will cease working for SC Corporation before vesting. All five employees continue employment for the three-year requisite service period and achieve their targets for vesting in the SARs.
SC Corporation calculates cumulative compensation cost by taking the total number of SARs that it granted, multiplied by the percentage of the requisite service period that has been completed, multiplied by each SAR's fiscal year-end fair value. The cumulative compensation cost represents the ending liability balance of the outstanding SARs at the end of the fiscal year and expense is recognized or reversed each year to adjust the liability to the appropriate ending balance.
The following table summarizes the SARs activities. For simplicity, all SARs are assumed to be exercised at the beginning of the fiscal year.
(Abbreviations: O/S = Outstanding)
Fiscal year | Granted | SARs O/S | Fair value per SAR at 12/31 | % Requisite service completed | Ending liability balance | Annual compensation cost* |
20X1 | 100,000 | 100,000 | $12 | 33% | $400,000 | $400,000 |
20X2 | — | 100,000 | $14 | 67% | $933,333 | $533,333 |
20X3 | — | 100,000 | $17 | 100% | $1,700,000 | $766,667 |
* Ending liability balance (i.e., the cumulative compensation cost) = the number of SARs outstanding × percentage of requisite service completed × the fair value per SAR at the end of the fiscal year. Annual compensation cost is the change in the liability balance during the year.
| ||||||
Fiscal year | SARs exercised | SARs O/S | Fair value per SAR | Exercised SARs: cash settlement | Liability balance** | Annual compensation cost | |
At 1/1 | At 12/31 | ||||||
20X4 | 60,000 | 40,000 | $17 | $21 | $(1,020,000) | $840,000 | $160,000 |
20X5 | 20,000 | 20,000 | $21 | $18 | $(420,000) | $360,000 | $(60,000) |
20X6 | 20,000 | — | $18 | $(360,000) | $0 | $0 | |
** Liability balance is the beginning balance less cash payouts for exercised SARs of $1,020,000 (60,000 * $17), $420,000 (20,000 * $21), and $360,000 (20,000 * $18) in 20X4, 20X5, and 20X6, respectively, plus or minus changes in the stock price for SARs that remain outstanding of $160,000, ($60,000), and nil for 20X4, 20X5, and 20X6 respectively. Since the awards are fully vested, the ending liability for each year equals the number of SAR's outstanding at the end of each year multiplied by the fair value per SAR at the end of the year.
| |||||||
How should SC Corporation account for cash-settled SARs with service and performance conditions?
Analysis
SC Corporation records the following journal entries:
Dr. Compensation expense | $400,000 | |
Cr. SBC liability | $400,000 | |
To recognize compensation expense in 20X1 for the 20X1 award | ||
Dr. Compensation expense | $533,333 | |
Cr. SBC liability | $533,333 | |
To recognize compensation expense in 20X2 for the 20X1 award | ||
Dr. Compensation expense | $766,667 | |
Cr. SBC liability | $766,667 | |
To recognize compensation expense in 20X3 for the 20X1 awards | ||
On January 1, 20X4, 60,000 SARs are exercised at a fair value of $17 per SAR, resulting in a cash payment of $1,020,000 (60,000 × $17).
Dr. SBC liability | $1,020,000 | |
Cr. Cash | $1,020,000 | |
To recognize exercise of 60,000 SARs at a fair value of $17 in 20X4 | ||
On December 31, 20X4, the fair value of each SAR is $21 for the 40,000 SARs that are outstanding. SC Corporation should recognize additional compensation expense for the $4 increase in the fair value.
Dr. Compensation expense | $160,000 | |
Cr. SBC liability | $160,000 | |
To recognize compensation expense in 20X4 for the 20X1 awards | ||
On January 1, 20X5, 20,000 SARs are exercised at a fair value of $21 per SAR, resulting in a cash payment of $420,000 (20,000 × $21).
Dr. SBC liability | $420,000 | |
Cr. Cash | $420,000 | |
To recognize exercise of 20,000 SARs at a fair value of $21 in 20X5 | ||
On December 31, 20X5, the fair value of the 20,000 SARs that remain outstanding is $18 each. SC Corporation adjusts its compensation expense to reflect the $3 decrease in the fair value. Therefore, an adjustment of $60,000 reduces the SBC liability to $360,000.
Dr. SBC liability | $60,000 | |
Cr. Compensation expense | $60,000 | |
To adjust the SBC liability to its fair-value amount at the end of 20X5 | ||
On January 1, 20X6, the final 20,000 SARs are exercised at a fair value of $18 per SAR, resulting in a cash payment of $360,000 (20,000 × $18).
Dr. SBC liability | $360,000 | |
Cr. Cash | $360,000 | |
To recognize exercise of 20,000 SARs at a fair value of $18 in 20X6 | ||
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
