For Employee stock purchase plan, if employee can buy at 15% discount to the lowest stock price for the half of the year, how does it affect earnings now vs before FAS(123R) rule. Companies changed for some reason from 15% to 5% discount price since FAS (123R) supported at 5%. Could you please explain what it means. I feel stock based compensation secton is very difficult to understand. Apprecaite for any pointers. Thanks, Giri
There seems to be more penalty (in the sense that you have to report higher compensation costs) if you give employees a 15% or more discount from the public price. FAS 123R made it so that you can only give a 5% discount to discourage employers from giving significant discounts to employees (or else it will show up in higher compensation costs, which means higher PBO/pension expense & lower NI). As a result, companies have gradually moved away from ESPP plans. At least this is what I think it means as I read over it. I would love it if someone could confirm or reject my stance on the issue.
Dennis I think you’re right on - but not sure about the higher comp costs leading to higher PBO/pension expense - I thought the additional charge would just hit the Income Statement through additional compensation expense, lowering Net Income and EPS. Anyone?
Well i think companies can give you any discount but they have to expense the discount like stock options if its greater than 5%, there are companies that still have discounts greater than 5% as i work for one. ESPP isnt involved in PBO as it isnt a defined benefit plan, just squirells around on the income statement and socf…I think
That is right. The cost is a non-cash expense item recognized by the company which probably represents the 15% discount of MV at the time of purchase by the employee. This has nothing to do with PBO.
How is the ESPP transaction for Employee affects income statement and balance sheet in 5% discount vs 15%. Here are conclusions from previous posts -ESPP is not related to PBO -If it is 5% discount, it is not needed to be expensed where as 15% discount needs to be expensed I am assuming that if it is 15% discount, expense is shown in income statement. So balance sheet affects in retained earings. Is it correct? If it is 5% dicount, Is it off balance sheet? Where does expense goes? Appreciate for any useful links
giribk Wrote: ------------------------------------------------------- > How is the ESPP transaction for Employee affects > income statement and balance sheet in 5% discount > vs 15%. > > Here are conclusions from previous posts > -ESPP is not related to PBO That’s why it’s in a different reading - it has nothing to do with pensions, it is to do with incentive/compensation schemes. > -If it is 5% discount, it is not needed to be > expensed where as 15% discount needs to be > expensed The (new US GAAP) rules state that the scheme must not be “compensatory”, otherwise it has to be expensed. There is 5% leeway, which is supposed to represent the cost of raising new money through an equity issue. So it’s more of a “the company must not be worse off”, rather than a “the employee must not derive a benefit” rule. Bear in mind IFRS doesn’t allow this 5% discount. > > I am assuming that if it is 15% discount, expense > is shown in income statement. I’d assume so - but I think most companies have now abolished their ESPP schemes with big discounts, so probably unlikely to be tested. But I’d assume it would go down as compensation expense. > So balance sheet > affects in retained earings. Is it correct? Only in the sense that the earnings are lower in that year (so on an ongoing basis retained earnings will be lower). I don’t think there is any need to make an adjustment to the balance sheet otherwise. > > If it is 5% dicount, Is it off balance sheet? > Where does expense goes? There is no expense to expense. Cash comes in from the employee (CFF), becomes an asset (cash on balance sheet), and new stock is created (liability). > > Appreciate for any useful links Caveat: I’m not 100% certain on this.
chrismaths, Thanks a lot for reply. Now I am lot clearer now. If company gives 15% discount, it is expensed similar to employee bonus. Otherwise, if company gives 5% discount, it is as if company raised money by issuing new shares. The 5% is win/win for employee and company since employee gets discount and company can get money without incurring expenses from investment banks to raise capital although company intention is not really to issue shares. I guess GAAP is little lenient to allow companies to offer 5% ESPP. It used to be companies gives lowest price from either January 1st or lowest on the day employee buys. But my company changed rule to offer shares lowest price on the pay check day. ESPP is no more much benefit Giri