No. Sorry I mislead you earlier. Just confirmed with my CPA business partner.
maratikus Wrote: ------------------------------------------------------- > 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? Let me try to help with the intuition here. You don’t run the amount (MV-X)*shares through the IS because it was already accounted for in the probability in the fair value calculation based on your model. The model looks at 6 different inputs to determine the value at the grant date. It would bel like double counting if you ran it though the IS again. BUT, you do get a real world tax benefit from the market price being above the strike price. Keep in mind that this is just for 123®. There are many firms that still don’t use this.
to summarize: 1) stock options are expensed on financial statements at fair value (option model) at issuance -> create DTA because they are not expensed in tax statements 2) if they are not excercised nothing happens 3) if they are, they are expensed in tax statements but not financial statements (no effect on Income statement) 4) this tax benefit goes to equity (additional paid in capital).
Right…and the cash flow from the orignal DTA goes to CFO while the excess tax benefits goes to CFF.
I see. thanks a lot, mwvt!
Just to throw in my two cents, the deferred tax asset is created when options are expensed over the vesting period based on the option value (using black-scholes) at the date of grant. So if an option was valued at $10, the dta would be $4 (assuming 40% tax rate). The tax deduction occurs on the exercise date based on the intrinsic value at that date. So if the same option had a strike price of $30, but was exercised when the FMV of the underlying stock was $55, the tax benefit would be the $25 intrinsic value times the tax rate of 40% which is $10. The excess deduction of $6 (10-4) is recorded in equity and is reflected on the cash flow statement as CFF.
stuartma10 Wrote: ------------------------------------------------------- > Just to throw in my two cents, the deferred tax > asset is created when options are expensed over > the vesting period based on the option value > (using black-scholes) at the date of grant. So > if an option was valued at $10, the dta would be > $4 (assuming 40% tax rate). Could you help me understand granting options over the vesting period? What does that mean?
^exactly
the vesting period would be the period from when options are granted until they expire. the question is if the vesting period is 2 years should we assume effects on income statement for the next 2 years?
Yes. If the fair value of the option is 1,000 and the vesting period is 2 years, then you will have a 500 compensation expense on the IS for the next two years.
so, DTA will increase over 2 year period.
we are probably going into too much detail LOL
@mwvt9… still my doubt is unclear… when the excess tax benefits are created we are increasing addional paid in capital…whats the corosponding effect on balance sheet??? excess tax benefits is for tax purposes…right??? which account of balance sheet will get affected??? thanks
Sorry for being late to the class =) Shahhr, Increase DTA and Increase Equity(Paid in capital). Anish
so is this everything we need to know about stock compensation accounting or is there more?
Thats it =)
sweet! so then what is the 5% rule, if the difference between the market price and the excercise price is less than 5% then it is not expensed and then its considered to expire?
the 5% rule referes to employee stock purchase plan not options
The 5% is the level of discount that is viewed as not being “compensatory” under employee stock purchase plans. If they offer a discount in excess of 5% than the transaction has to be viewed as part of compensation.
stuartma10 Wrote: ------------------------------------------------------- > Just to throw in my two cents, the deferred tax > asset is created when options are expensed over > the vesting period based on the option value > (using black-scholes) at the date of grant. So > if an option was valued at $10, the dta would be > $4 (assuming 40% tax rate). > > The tax deduction occurs on the exercise date > based on the intrinsic value at that date. So if > the same option had a strike price of $30, but was > exercised when the FMV of the underlying stock was > $55, the tax benefit would be the $25 intrinsic > value times the tax rate of 40% which is $10. The > excess deduction of $6 (10-4) is recorded in > equity and is reflected on the cash flow statement > as CFF. By your example, is the DTA of $4 removed from B/S and reflected as a CFO once it is excercised?