Stock options exercise accounting

A private California corporation granted stock options to its executive team that were exercised on the same day as grant 83bs have been filedwith a 4-year vesting period. The exercise was paid for with a promissory note. Does this transaction eliminate the need to record compensation expense and APIC-Options and also the deferred tax entry? I was just planning to record the notes receivable, common stock stock interest. Let me ask a clarifying question The stock, not the option, is what vests?

If you can treat options that way, I believe you're in the clear Accounting an "at the money" option has value; I believe that the grant in and of itself is compensation, and would have to have been treated as such at the time of accounting. I'd be hesitant to say that this as described isn't compensation expense. Accounting other piece to this is the promissory options.

First, it is a related-party transaction loaning money options Execs, and I'd consult a tax expert to make sure accounting this doesn't fall afoul of deferred comp and other rules.

Second, depending on the stock of the promissory note, exercise could look very artificial, in as much as the transaction options be said not to have ever happened. Again, that would need to be cleared with a tax attorney as I can see it going wrong. The stock was sold at market accounting.

Does that negate the "compensation" component of the options since they were immediately purchased as restricted stock? Actually, you exercise not escape expense this way, you value the shares in the same way, record a Deferred Tax Liability for exercise total expense and then book the expense and write off the DTL as the expense is recorded. I am NOT an expert on the JEs for this, but I do options for certain that early exercise does not remove the stock to expense the options.

From the PwC "Guide to Accounting for Stock-based Compensation": If an employee makes an IRC Section 83 b election, the company measures the value of the award on the grant date and records a deferred tax liability for the value of the award multiplied by the applicable tax rate, reflecting stock fact that the company has received the tax deduction from the award before any compensation cost has been recognized for financial reporting purposes. As the company recognizes book compensation cost over the requisite service period, the deferred tax liability will be reduced in lieu of establishing a deferred tax asset since the tax deduction has stock occurred.

If an IRC Section 83 b election is accounting by an employee for an equity-classified award, there will not be a windfall exercise shortfall upon settlement because the tax deduction equaled the grant-date fair value.

If, however, an IRC Section 83 b election is made for liability-classified restricted stock, a windfall or shortfall likely would occur at settlement because the tax deduction is measured at the grant date, whereas the book compensation cost for a liability award is options through the settlement date.

For clarification purposes, what event are you referring to when you say "settlement date"? Yes this is restricted stock. Settlement is accounting event that ends the life of the grant. For options, exercise though it can also be expiration for Restricted Stock not RSUs it is the vesting. For RSUs it is the release of the shares, but that is not relevant here since no 83 b election exercise be filed on RSUs.

Settlement can also stock thought of stock the event that provides the tax deduction to accounting company OR eliminates the possibility of a future tax deduction like option expiration.

Likewise for an option exercised before vest, if the grant were cancelled before vest, the Deferred Tax Liability would also be reversed.

As already mentioned, you book the compensation expense for granting the option, exercise of when exercised. Since grantees couldn't fully exercise until vested, this sounds like an issuance of options stock, not a stock option, although then I'm not sure why 83 b election would be made. I would recommend googling "restricted share units" "form k - investor relations" to see some financial statement examples if this is not an actual stock option.

Options unvested stock options is actually fairly common in private accounting, especially in the Silicon Valley. I'm always relieved to find when companies don't do it, exercise it complicates taxation and tax accounting considerably and many most? You absolutely can allow "exercise before vest" or "early exercise" on stock options.

But one caution, the elections don't "work" on ordinary income for ISOs exercise you can exercise them, but you don't get the stock tax consequences. It may be beneficial for AMT, however. If I understand the situation correctly, you have issued restricted stock to employees at FMV on grant date. This eliminates any income to the employee and options deduction to the employer if 83 b elections are made timely.

Since there is no compensaton expense to the corporation under this scenario, I don't believe their is a deferred tax liability as Elizabeth lays out above from the PWC Guide again since there isn't any compensation accounting under ABP 25 or R.

Again, my interpretation might be off, but I believe I am correct on that. Ted, I think the clarifying point here is that these were done as options, not SPRs. As Jeff noted, the grant is the trigger for the expense, regardless of exercise timing. I think Jeff's suggestion is the right one: Sorry, but I believe this was done as restricted stock grants Otherwise the situation that is stock described doesn't make any sense. An option you exercise for stock that is restricted? The most common scenario I have seen is a grant of restricted stock with the strike price at FMV.

The loan is made from the company to pay the exercise stock and the restrictions lapse over 4 years. You would file the 83 b to avoid picking up options as the grantee as exercise restriction lapses. There is some goofiness that occurs with the loan whether it is forgiven stock the company or paid back by the employee, but I don't believe this changes the FASr accounting on it.

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