Schweser Pg. 287 Can anyone explain the difference expecially the reason’s behind the CF impact
I don’t understand all of this, but I doubt we will really have to know it down to the nuts and bolts. When a company grants stock options they have to use a fair value model to determine the value on the GRANT date. Once that value is established in is expensed in that year (unless there is vesting, in which case the fair value is spread over the vesting period). Stock option expense is deductible for book but not for tax, so a DTA is created. DTA=compensation expense*tax rate. When the option is exercised this DTA reverses, but the company will also realize excess tax benefits. These are equal to (market value of the stock - exercise price)*number of options*tax rate. You then have to tax that number and back out what you already have booked to your DTA. For example, if (MV-Ex)*options*tax rate=100 and your DTA was 50 then you have 50 in excess tax benefits. The DTA is shown as a cash inflow flow to CFO and the excess tax benefits go to CFF. Why exactly that happens I will have to leave for an accounting guru. Which I am not…for sure.
By the way pink a full example is on p. 227. The example you are looking at has only to due with the CF statement effects.
DTA = CE*T Excess TB = (S - X)*NOSO*T
lol mwvt9 - You rock!
What is NOSO?
mwvt9 Wrote: ------------------------------------------------------- > What is NOSO? In my world they represent, the [N]o [o]f [S]tock [O]ptions that are exercised by the vested employees
Gotcha. I am posting out of guilt tonight as I watched the Penguins crush the Flyers.
I don’t know this topic extremely well…but am gonna take a shot at it anyways… mwvt9 Wrote: ------------------------------------------------------- > The DTA is shown as a cash inflow flow to CFO and > the excess tax benefits go to CFF. I think the DTA is a form of salaries/compensation so its like a part of a company’s operating expenses, hence the DTA goes to CFO. The excess benefits come because of the issuance of shares when the options are exercised. This now becomes a financing activity as your equity gets affected - which is why the cash flow is directed towards your CFF > > Why exactly that happens I will have to leave for > an accounting guru. Which I am not…for sure. I’m not an accounting guru either…but we all try to be the best we can !! haha (until I get corrected by others…)