Employee Stock Purchase Plans and the Calculation of Basic

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impact of ESPPs on the number of shares An interim period adjustment is not very EPS Calculation. outstanding particularly if the dilutive common unless there is a substantial Because there is no specific guidance. effect is material or is expected to change in the operation and structure of the regarding the impact of ESPP on the cal. become material in certain periods The fol company for example if a company has culation of diluted EPS the general guid. lowing discussion provides a framework to gone through a major restructuring mass ance for inclusion of options in the calcu. help CPAs incorporate some of the best layoff and closure of certain facilities lation of diluted EPS prevails According. practices for accounting for the dilutive to ASC 260 45 28A. effect of ESPPs ESPP Tax Considerations Awards of share options and nonvested. ESPPs like ISOs are awards that meet shares as defined in Topic 718 to be. How ESPPs Work specific IRS requirements for classification issued to an employee under a share based. ESPPs are designed to promote employ as statutory stock options There is no tax compensation arrangement are considered. ee stock ownership by providing employ due to employees at the time they are options for purposes of computing dilut. ees with a convenient means usually granted When the employer transfers the ed EPS Such share based awards shall be. through a payroll deduction to acquire a shares to employees at the end of the offer considered to be outstanding as of the. company s shares An ESPP is a contrac ing period the employee is taxed on the grant date for purposes of computing dilut. tual promise that permits an employee to spread i e the difference between the pur ed EPS even though their exercise may. acquire an employer s stock on a future chase price and fair value of the stock be contingent upon vesting. date under the terms and conditions Therefore from a tax accounting perspec As previously mentioned ESPPs are. established on the grant date An ESPP also tive ESPPs are considered permanent dif treated as ISOs under ASC 718 because. allows employees to set aside a certain per ferences and no deferred tax assets DTA they are granted at the beginning of the. centage of their compensation over an are recorded when they are expensed period at a defined price and their vest. offering period usually one year or less If an employee completes a qualifying ing is subject to continuation of service. in order to purchase their company s stock disposition whereby the employee sells Therefore all ESPP contributions prior. An employer then uses the withheld the stock at least two years after the grant to vesting are subject to a diluted EPS. amounts to acquire the company s stock date and one year after the date of exer calculation but they will not be includ. from the market at a discounted rate at cise or purchase the statutory holding peri ed in a basic EPS calculation until the. the end of the offering period and deliv od the employee will recognize capital company delivers the shares to employ. ers the stock to employees gains instead of ordinary income on the. The discount is typically applied to the sale of the stock If on the other hand. lesser of the beginning or ending of the the employee sells the stock before the. offering period stock price Companies usu statutory holding period ends the sale. ally allow enrolled employees to withdraw will be a disqualifying disposition and. their contributed funds prior to the end of the employee will recognize ordinary. the offering period for various reasons income which is taxed at a higher rate. including possible termination or emer If the employer has granted statutory. gency Some companies even allow stock options e g ISOs or ESPPs it. employees to reduce their contribution per will receive a tax deduction only upon a. centage during the offering period disqualifying disposition If there is a dis. qualifying disposition the employer will, ESPP Compensation Expense be entitled to a tax deduction if 1 the. At the beginning of the ESPP offering employee recognizes ordinary income at. period management must estimate the the time of sale and 2 the employer reports. number of shares of stock that employees the income An employer must be able to. will eventually purchase under an ESPP satisfy the requirements of Internal. program This estimate is based on the Revenue Code IRC section 6041 by pro. employees withholding elections status viding the employee with a Form W 2 or. changes and the existing stock price Form W 2 c whichever is appropriate. Companies usually use the Black Scholes and then filing the form with the IRS by. Merton valuation model to calculate the the date that the employer files the tax. compensation cost for ESPP at the begin return claiming the deduction related to. ning of the period the disqualifying disposition, Companies amortize the estimated com Neither qualified nor disqualified disposi. pensation expense ratably over the offer tions of ESPPs impact the calculation of dilut. ing period They also perform a cumula ed EPS Because no DTAs are recorded at. tive one time adjustment for compensation the time of commitment for the purchase of. cost based on the actual number of shares shares there is no tax consideration in the. granted at the end of the offering period calculation of diluted EPS for ESPPs. MAY 2012 THE CPA JOURNAL 33, ees participating in the ESPP program prevesting forfeiture reserve does not how Basic EPS Calculation. upon vesting ever impact the calculation of the assumed According to ASC 260 10 45. Since ESPPs are service based awards proceeds under the treasury stock method Shares issuable for little or no cash con. they should be considered for diluted EPS but only impacts the stock compensation sideration upon the satisfaction of certain. calculation purposes from the start date of expense This author believes that this con conditions contingently issuable shares. the offering period i e the service incep cept of forfeiture rate is not applicable to shall be considered outstanding common. tion date Payroll withholding for ESPPs is ESPPs because unlike stock options and shares and included in the computation of. simply a funding mechanism for the ultimate other equity awards the ESPP shares are basic EPS as of the date that all necessary. payment of the exercise price and is not a not actually granted at the beginning of the conditions have been satisfied in essence. factor in the calculation of diluted EPS offering period but are only committed when issuance of the shares is no longer. Under ASC 718 companies are required for the end of period release as such they contingent Outstanding common shares. to develop an assumption regarding the are not subject to forfeiture The estimat that are contingently returnable that is sub. prevesting forfeiture rate which will affect ed number of ESPP shares has a provi ject to recall shall be treated in the same. the amount of compensation costs recog sion for possible cancellation during the manner as contingently issuable shares. nized during the requisite period The offering period Because employees in an ESPP program. Information Used in the Calculation of EPS,First Second Third Fourth. Quarter Quarter Quarter Quarter Total, Expected total proceeds from ESPP 1 85 000 85 000 85 000 85 000 85 000.
Compensation costs 2 5 000 5 000 5 000 5 000 20 000. Unrecognized compensation at the beginning of quarter 3 20 000 15 000 10 000 5 000. Average unrecognized compensation quarter to date 4 17 500 12 500 7 500 2 500. Average unrecognized compensation year to date 5 17 500 15 000 12 500 10 000. Total assumed proceeds quarter to date 6 102 500 97 500 92 500 87 500. Total assumed proceeds year to date 7 102 500 100 000 97 500 95 000. Average stock price quarterly 110 95 110 90,Average stock price annually 110 105 110 105. Estimated shares to be issued under ESPP 1 000 1 000 1 000 1 000 1 000. Incremental ESPP shares for diluted EPS quarterly 8 68 26 159 28. Incremental ESPP shares for diluted EPS annually 9 68 48 114 95. Income loss quarter to date 10 000 12 000 500 5 000 26 500. Income year to date 10 000 22 000 21 500 26 500 26 500. Average number of common shares outstanding 100 000 100 000 100 000 100 000 100 000. 1 1 000 shares at 85 85 of 100 the price at the beginning of the period. 2 Black Scholes Merton valuation of 20 per share 20 000 per year for 1 000 shares or 5 000 quarterly. 3 20 000 total annual ESPP compensation recognized 5 000 quarterly. 4 The average unrecognized compensation at the beginning of two consecutive quarters For example the first quarter is the average of. 20 000 first quarter and 15 000 second quarter, 5 The average unrecognized compensation at the beginning of the first quarter and the beginning of the following quarter For example the. second quarter is the average of 20 000 first quarter and 10 000 third quarter. 6 Expected proceeds from ESPP plus average unrecognized compensation First quarter is 85 000 plus 17 500 which equals 102 500. 7 The same as above except that year to date information is used. 8 Total assumed proceeds quarterly divided by average stock price quarter to date less estimated shares to be issued First quarter is. 102 500 divided by 110 which equals 932 1 000 less 932 equals 68. 9 The same as above except that year to date information is used. EPS earnings per share ESPP employee stock purchase plan. 34 MAY 2012 THE CPA JOURNAL,must remain employed through the end of. the offering period in order to purchase the,ESPP shares their continued participation. in the plan is considered a contingency that,can only be satisfied at the end of the peri.
od Therefore ESPP shares are reflected in The determination of whether an award is dilutive must be made on a. the basic EPS calculation at the end of,the offering period when contingency is. removed and the actual shares are trans, quarterly and yearly basis for each grant not in the aggregate. ferred to employees,The employee participation according to. ASC 260 10 45 would not be considered,contingent if the employee s participation. were irrevocable even in the case of employ, ment termination In practice however it is The exercise of options and warrants and An Example of ESPP Calculation.
uncommon for an ESPP to allow employ their conversion to common stock is Entity A offered an ESPP to its employ. ees to continue participating in an ESPP plan assumed to occur as of the beginning of the ees with a discount of 15 applicable to. subsequent to their termination period or at the time of issuance if later the lower of the stock price at the begin. The proceeds from the hypothetical ning or the end of the offering period. Treasury Stock Method exercises are used to purchase common The stock price at the beginning of the. for Calculating EPS stock at the average market price during period was 100 and the company esti. The TSM assumes that a company uses the period ASC 260 10 45 29 and 10 mated that it would deliver 1 000 shares to. the proceeds from the hypothetical exercise 55 4 through 55 5 its employees at the end of the offering. of the awards to repurchase common stock The incremental shares the difference period The offering period lasted for one. at the average market price during the peri between the number of shares assumed. od Rashty and O Shaughnessy 2011 issued and the number of shares assumed. Therefore a higher amount of assumed pro purchased are included in the denomina. ceeds the numerator and a lower average tor of the diluted EPS computation The. market price during the reporting period incremental number of shares is always a. the denominator increases the number of positive number that is the exercise of. shares that a company can repurchase An the TSM cannot be antidilutive. increase in the number of shares that a com, pany can hypothetically repurchase lowers Diluted EPS Calculation. the denominator and raises the diluted EPS ESPP shares to be issued should be. The assumed proceeds under the TSM included in the computation of diluted EPS. include the following if the effect is dilutive ASC 260 10 45. The purchase price of the award that the 26 If the equity awards are outstanding. grantee pays in the future usually the exer for only part of a period the shares issuable. cise price of the stock options or ESPP shares should be weighted to reflect the portion. The average compensation costs for of the period during which the equity. future services that have not been recognized instruments were outstanding. Any windfall tax profits or shortfalls The determination of whether an award. due to the exercise of awards this would is dilutive must be made on a quarterly and. not be applicable to ESPPs yearly basis for each grant not in the. A company should include the unvested aggregate In the case of ESPP grants. ESPP committed contributions as contin however all of the shares in the program. gently issuable shares pursuant to ASC 260 are either dilutive or antidilutive The dilut. 10 45 17 when using the TSM for the ed EPS always results in an antidilutive. calculation of diluted EPS The assumed pro per share amount whenever an entity. ceeds for ESPPs under the TSM consist of reports loss from continuing operations or. the purchase price of the ESPPs and the aver a loss from continuing operations available. age unamortized compensation cost No to common stockholders i e after any pre. potential windfall tax profit or shortfall is ferred dividend deductions see ASC 260. calculation of stock based compensation and EPS do not have the special features needed to accommodate the specific requirements of ESPP calculation Companies must ensure that these pro grams are designed and implemented in such a way that they can provide for the Employee Stock Purchase Plans and the Calculation of Basic and Diluted Earnings per Share A CCOUNTING amp AUDITING accounting

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