can anyone explain abt the way excess tax benefits r accounted for… what is the other account affcted opposite additional paid in capital??? regards
Excess benefit flows through CFF. Anish
thats fine that excess benefits are CFF as it has generated because financing arrangement…but really i want to know is when excess tax benefits are generated equity will go up and what will be the other account which will be go up/down by same amount??? thanks
I think that one portion is equity goes up and deferred tax asset goes down. then excess tax benefit would go in equity through income statement - because of less tax expense. not sure though.
they have mentioned that no treatment to income statement of excess tax benefits…n i guess there wont any effect on deferred tax as excess tax benefit is permanant diffrence… correct me if im wrong thanks
Staright from Schweser (pg 227) “Compensation expense from stock options is not immediately deductible for income tax purposes; thus a deferred tax asset is created. This DTA is equal to the compensation expense multiplied by the firm’s tax rate.” “The excess tax benefits are reported as an increase in additional paid-in-capital, a stockholder’s equity account in the BS. The excess tax benefits have no net effect in the income statement.” “The tax benefit is CFO, and Excess tax benefit is CFF.” Remember that tax benefit is only applicable to nonqualified stock options. Anish
anish, could you help me understand what’s happening. 1) when stock options are issued, they should be expensed right away? 2) that should create tax benefit (because of this expense)? 3) when stock options are excercised, additional amount is expensed? 4) does that additional amount create excess tax benefit? 5) what happens if options expire worthless? 6) what’s the impact of stock options on cash flows?
This section gets me everytime 
maratikus Wrote: ------------------------------------------------------- > anish, could you help me understand what’s > happening. > > 1) when stock options are issued, they should be > expensed right away? Yes. Based on fair value of the stock option on the grant date (determine by a model) > 2) that should create tax benefit (because of this > expense)? It does. DTA created. > 3) when stock options are excercised, additional > amount is expensed? Yes. > 4) does that additional amount create excess tax > benefit? Yes. > 5) what happens if options expire worthless? Nothing. No reversal of your orginal expense. > 6) what’s the impact of stock options on cash > flows? If the employee exercises the option then you have to pay them. This is allocated to CFF. The orignal tax benefit from the DTA goes to CFO. Curriculum says that you should recategorize the CFF cash flow as CFO…I think.
maratikus Wrote: ------------------------------------------------------- > anish, could you help me understand what’s > happening. > > 1) when stock options are issued, they should be > expensed right away? > 2) that should create tax benefit (because of this > expense)? > 3) when stock options are excercised, additional > amount is expensed? > 4) does that additional amount create excess tax > benefit? > 5) what happens if options expire worthless? > 6) what’s the impact of stock options on cash > flows? Those are some good questions. I’d like to have my books handy before I attempt answering them. Anyone else?
got it! thanks, mwvt! You’ve helped me a lot in my preparation.
- when stock options are issued, they should be expensed right away? yes for financial statements but not for the tax statements… that creates the deferred asset mwvt9 are you sure about the following? 3) when stock options are excercised, additional > amount is expensed? Yes. If additional amt would be expensed then it would go through income statement no? if it’s considered cff then should it be expensed?
florinpop Wrote: ------------------------------------------------------- > 1) when stock options are issued, they should be > expensed right away? > > yes for financial statements but not for the tax > statements… that creates the deferred asset > > mwvt9 are you sure about the following? > 3) when stock options are excercised, additional > > > amount is expensed? > > Yes. > If additional amt would be expensed then it would > go through income statement no? if it’s considered > cff then should it be expensed? Sorry, I misunderstood the question. The additional amount is NOT expensed and run through the IS it is just an added tax benefit, which goes to CFF. I will check for sure when I get home. Make sure maratikus sees this, I don’t want to mess him up this late in the game.
mwvt is right… when stock options are exercised the amount (MV - X) * t creates the excess tax benefit which goes into your APIC… and affects your CFF
ok sounds good
mumukada Wrote: ------------------------------------------------------- > mwvt is right… > > when stock options are exercised the amount (MV - > X) * t creates the excess tax benefit which goes > into your APIC… and affects your CFF What is APIC?
additional paid in capital… I assume
That makes sense.
you assume correct…
mumukada Wrote: ------------------------------------------------------- > mwvt is right… > > when stock options are exercised the amount (MV - > X) * t creates the excess tax benefit which goes > into your APIC… and affects your CFF is there impact on IS?