Accounting and investment question?

summary

statement establishes financial accounting , reporting standards stock-based employee compensation plans. plans include arrangements employees receive shares of stock or other equity instruments of employer or employer incurs liabilities employees in amounts based on price of employer's stock. examples stock purchase plans, stock options, restricted stock, , stock appreciation rights.

statement applies transactions in entity issues equity instruments acquire goods or services nonemployees. transactions must accounted based on fair value of consideration received or fair value of equity instruments issued, whichever more reliably measurable.

accounting awards of stock-based compensation employees

statement defines fair value based method of accounting employee stock option or similar equity instrument , encourages entities adopt method of accounting of employee stock compensation plans. however, allows entity continue measure compensation cost plans using intrinsic value based method of accounting prescribed apb opinion no. 25, accounting stock issued employees. fair value based method preferable opinion 25 method purposes of justifying change in accounting principle under apb opinion no. 20, accounting changes. entities electing remain accounting in opinion 25 must make pro forma disclosures of net income and, if presented, earnings per share, if fair value based method of accounting defined in statement had been applied.

under fair value based method, compensation cost measured @ grant date based on value of award , recognized on service period, vesting period. under intrinsic value based method, compensation cost excess, if any, of quoted market price of stock @ grant date or other measurement date on amount employee must pay acquire stock. fixed stock option plans-the common type of stock compensation plan-have no intrinsic value @ grant date, , under opinion 25 no compensation cost recognized them. compensation cost recognized other types of stock-based compensation plans under opinion 25, including plans variable, performance-based, features.

stock compensation awards required settled issuing equity instruments

stock options

stock options, fair value determined using option-pricing model takes account stock price @ grant date, exercise price, expected life of option, volatility of underlying stock , expected dividends on it, , risk-free interest rate on expected life of option. nonpublic entities permitted exclude volatility factor in estimating value of stock options, results in measurement @ minimum value. fair value of option estimated @ grant date not subsequently adjusted changes in price of underlying stock or volatility, life of option, dividends on stock, or risk-free interest rate.

nonvested stock

fair value of share of nonvested stock (usually referred restricted stock) awarded employee measured @ market price of share of nonrestricted stock on grant date unless restriction imposed after employee has vested right it, in case fair value estimated taking restriction account.

employee stock purchase plans

employee stock purchase plan allows employees purchase stock @ discount market price not compensatory if satisfies 3 conditions: (a) discount relatively small (5 percent or less satisfies condition automatically, though in cases greater discount might justified noncompensatory), (b) substantially full-time employees may participate on equitable basis, , (c) plan incorporates no option features such allowing employee purchase stock @ fixed discount lesser of market price @ grant date or date of purchase.

stock compensation awards required settled paying cash

stock-based compensation plans require employer pay employee, either on demand or @ specified date, cash amount determined increase in employer's stock price specified level. entity must measure compensation cost award in amount of changes in stock price in periods in changes occur.

disclosures

statement requires employer's financial statements include disclosures stock-based employee compensation arrangements regardless of method used account them.

pro forma amounts required disclosed employer continues apply accounting provisions of opinion 25 reflect difference between compensation cost, if any, included in net income , related cost measured fair value based method defined in statement, including tax effects, if any, have been recognized in income statement if fair value based method had been used. required pro forma amounts not reflect other adjustments reported net income or, if presented, earnings per share.

effective date , transition

accounting requirements of statement effective transactions entered in fiscal years begin after december 15, 1995, though may adopted on issuance.

disclosure requirements of statement effective financial statements fiscal years beginning after december 15, 1995, or earlier fiscal year statement adopted recognizing compensation cost. pro forma disclosures required entities elect continue measure compensation cost using opinion 25 must include effects of awards granted in fiscal years begin after december 15, 1994. pro forma disclosures awards granted in first fiscal year beginning after december 15, 1994, need not included in financial statements fiscal year should presented subsequently whenever financial statements fiscal year presented comparative purposes financial statements later fiscal year.

briefly explain accounting requirements stock compensation plans under statement of financial accounting standards no. 123.

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