If a company gives stocks(ESPP) to an employee, how does it exactly reflects income statement and balance statement for 5% vs 15% discount? My understanding is if it is 5% discount, it does not go through income statement or CFO. It will affect CFF. I guess if it is 15% discount, it will affect income statment and CFO and does not affect CFF. Is it true? So, income should be reduced by 15% discount. I really not sure where 5% discount goes.
If I remember this correctly, then you are absolutely correct in what you are saying. How I look at it is if the company offers a ESPP with a discount of 5% to its employees then it’s a genuine capital raising act and that 5% discount is kind of like the loyalty for having working with the company. So there should be no compensation expense reported for this transaction on the income statement and the cash inflow would classify as a cash flow from financing CFF But if the Mgmt go the other way round, they list a discount of 15% on company stocks then, they are not raising capital (probably) and instead compensating the vested employees instead of giving them actual $$. So it comes under day-to-day operations, hence the Compensation Expense needs to be recorded on the Income Statement and the cash flow is classified as CFO (and not CFF) … But hold on till tonight, I don’t have the books with me now. I will re-confirm all of this once I get home.
5% is considered a safe harbor. There is no brightline for it but if the discountexceeds the per share costs of a public offering, then it is compensation and hits the IS and needs to be added back to CFO.
The 5% represents the cost the company would otherwise incur in raising capital on the markets (investment banking fees, advice fees, lawyers yada yada). IAS doesn’t allow this discount. so: IAS: to be non-compensatory there must be no gain to the employee US GAAP: to be non compensatory there must be no loss to the employer I think that on the Cash flow statement, the money in from the employee is always a CFF, the discount could go into CFO (as it is compensation expense).
Thanks for replies. By expensing ESPP shares, company saves tax dolloars. right? For example, if company stock is $100, employee will get share for $85 (with 15% discount). So, company will save $6($15*.4) by expensing ESPP share. I did not understand why companies complained on expensing ESPP expenses or stock options when the new GAAP rule was enforced.