I need a talking-to-a-10-year-old kinda explanation of this… schweser doesn’t define this very well…and I don’t wanna go through the entire CFa text searching for where they do… help!
wake up people!! could really use some help here…Joey? Niblita? anybody!
I’m blacking out on where I read this. I just searched the LOS online and no results came up. Can you tell me what section/topic this is coming from?
hahaha… that dumbass reading of employeee stock options
Thats what I was thinking, let me check real quick.
compensatory - options granted as part of compensation of an employee (ie. salary, bonus, etc.) noncompensatory - options given to employees to raise capital and/or raise the distributions of shares owned by employess. NOT tied to compensation. I think this is right…
I did a quick scan of the text and I didn’t even see anything about it.
niblita…this is in the schweser text…i dunno about cfai… but if it’s not in the cfai…then I guess chances of it being mentioned on the test are minimal!
I was looking through CFAI text.
compensatory means that the stock options were granted as a part of employee benefits. the difference comes in the price at which the options are granted if the discount is too big - i think it was more than 5% the options are considered compensatory i’ll look it up and make some detailed comments about it
ok there it is ss6 page 229 schweser “with an employee stock purchase plan, employees can usually purchase stock at a discounted price over a specific period of tine.If the plan is considered compensatory, compensation expense is recognised over the remaining service life of the employees.No compensation exepnse is recognised if the plan is noncompensatory. A number of criteria must be met in order for an employee stock purchase plan to be considered noncompensatory.One of the criteria relates to the size of the discount. Accordingly, the discount cannot exceed the per share transaction cost of a public offering.A discount of 5% or less is considered a safe harbor…”
i think it’s pretty straight forward if you offer stock to employees at a high discount, that is recognised as a compensation and therefore can be expensed
so …does that mean what budfox said is irrelevant? is the distinction made based on the discount? or the fact that the options were offered as a part of the employee benefits, vs raising capital!!?
I think the decision is made on the %'age of discount. It’s probably called … hmmm… 5% discount rule or something (I read it on the internet or somewhere) So if the employer offers stock options at say 10% discount of the market value ( i.e. less than <5%) They will be counted as Compensatory and needs to be expensed
no what says budfox is consistent with the idea there is a benefit- a compensation only if there is a discount
You are only allowed the 5% discount under US GAAP as well. It’s supposed to represent the cost of raising new equity - so compensatory under US GAAP becomes “no cost to the employer”, whereas under IFRS it’s “no benefit to the employee”.
ya’ll are confusing me… you say what budfox says is also correct, but you also mention the fact about the discount size defining whether it’s compensatory or not…so which one is it?