accounitng question

whats the stock compensation impact on the balance sheet? it is expensed on the P&L reducing net income. it is added back as non-cash expense on the cash flow statement, increasing cash flow from operations. retained earnings should be affected because of the impact on net income. what other account on the balance sheet is affected (besides cash)?

Mobius Striptease Wrote: ------------------------------------------------------- > whats the stock compensation impact on the balance > sheet? > > it is expensed on the P&L reducing net income. it > is added back as non-cash expense on the cash flow > statement, increasing cash flow from operations. > > retained earnings should be affected because of > the impact on net income. > what other account on the balance sheet is > affected (besides cash)? Indirectly, SG&A is understated, no? i.e. your startup (which we’ll call TwitterBookedIn) uses stock comp to lure people in, pays less than avg base/bonus. Relative to YeOldeIndustrialConglomerate, TwitterBookedIn looks like it has lower SG&A expense, right? Edit: Read your post quickly. Didn’t notice you specifically wanted only the balance sheet effect --> in which case my post is irrelevant. Frowns.

not an accountant here, but I do believe the offsetting entry is an increase to additional paid in capital. since non-cash comp, cash is not impacted.

When options are exercised, the share capital and retained earnings accounts are also impacted, under US GAAP. Net effect is capital is increased by the amount of cash received from exercised options. More specifically, though: 1. Share capital is increased by (i) the cash received from the option exercise and (ii) the grant-date fair value of the exercised options; and 2. Retained earnings is reduced by the grant-date fair value of the exercised options. Take a look at the Statement of Changes in Shareholders’ Equity (published in 10-Ks/Qs) for some practical examples.

^ok but i was more interested in the impact of granting options, not exercising them. under US GAAP options are expensed at the time of the grant. the impact on the P&L is clear. i really cant find a clear description of what happens on the balance sheet anywhere

Aside from the items I noted above, which are all triggered upon exercise, the only B/S impact is within retained earnings (i.e., because net income each period includes stock comp. expense). The share capital accounts are only impacted when options are exercised (i.e., the point at which new shares are issued).

where do i go wrong in this chain of thoughts: we have 2 identical companies A and B. they both have net income of $20M for the year. company A didnt grant any equity comp, all of its expense is cash-based. company B expensed $10M of stock options in the for the year (there were only grants, no exercises). for company B, we will add back $10M of non-cash stock comp expense to the net income in the cash flow statement. there will be no corresponding adjustments for company A. so company B will have cash flow from operations that is $10M higher than company A, and consequently company B’s ending cash balance is $10M higher. how is this balanced in the equity section of the balance sheet? obviously since net income is the same, retained earnings are the same too.

Gotcha. The option expense embedded in net income is backed out of the contributed surplus account.

awesome - thanks!