GAAP And Stock-Based Compensation Expense

  • Posted: 02 October 2010 12:15 AM

    Everyone:

    It’s been a number of years since I stood under the glare of a public audit requirement on the for-profit side of the economy. Since that time accounting rules on the reporting of stock-based compensation has changed. If my understanding is correct (Mercel and our other wizards of the accounting trade please advise), under current GAAP requirements, the difference between the option price and the value of the shares at the moment options are exercised is now recognized as an “expense” for reporting purposes, although no cash has been dispensed.

    Further, options exercised and non-exercised but available for conversion into shares are already factored into the fully diluted share count. So while there might not be a dilution of the shares when options are exercised, the exercised options have already been factored into the diluted share count.

    Thus, this “expense” is already factored into the share dilution ahead of it being recognized on the P&L. If this is the case, there’s no real “expense” from the standpoint of a cash distribution but a recognition at a later date on the P&L of the share dilution that’s already been recognized on the equity side of the balance sheet.

    Is my understanding correct?

         
  • Posted: 02 October 2010 03:17 AM #1

    One of the reasons I’m bringing up this issue is that the stock-based compensation component of OpEx are influenced by factors other than a scaling of costs due to increased revenue activity and regular operating expenses.

         
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    Posted: 02 October 2010 07:15 PM #2

    DT, I’m not an expert in these accounting rules, but I think your assumptions here are correct.

    Not sure if this is related, but a few weeks ago, while looking at the expansion in the shareholder’s equity section of the balance sheet, I thought I found a nice correlation between the average price per share Apple received from newly issued common stock with the market price of AAPL 6 quarters before [edit: ran the numbers again and the lag is only between 2 and 3 quarters]. At the time I couldn’t think of anything in the P&L to use this as a model of (and unfortunately I’ve since removed the relevant data and ratios), but it might help in modeling the stock compensation component of opex. Give it a shot?

    [ Edited: 02 October 2010 08:44 PM by deagol ]      
  • Posted: 04 October 2010 09:56 PM #3

    Straight out of Apple’s F/S below is a description for its accounting of stock-based compensation.  A word of caution: Black-Scholes is not for the faint of heart, as this pricing method for options really digs deep within the more esoteric world of f/s reporting.