Reading 25- LOS b ～ Q 1－4

1.Do U.S. financial reporting standards (U.S. GAAP) and international financial reporting standards (IFRS) have a “capital raising transaction” exception when determining whether an Employee Stock Purchase Plan is compensatory or noncompensatory?

A)       Yes                                    Yes

B)       No                                      No

C)       Yes                                   No

D)        No                                    Yes

Click for Answer and Explanation C)

There is no “capital raising transaction” exception under IFRS. Under U.S. GAAP, a discount can be offered to employees as long as it does not exceed the cost of issuing securities in the public market. Under U.S. GAAP, a discount of 5 percent or less is considered a safe harbor.

2.Cobra Company offers its employees a stock purchase plan. According to the plan, employees can purchase stock at 95 percent of the market value on the purchase date. The stock is purchased from Cobra’s treasury shares. During the year, employees contributed $19 million to the plan and the market value of the shares issued was $20 million. The book value of the treasury stock was $17 million. Ignoring payroll taxes, what amount of compensation expense should Cobra report for the stock purchase plan under U.S. financial reporting standards (U.S. GAAP) and international financial reporting standards (IFRS)?

A)      $1 million                                 $0

B)      $3 million                                 $1 million

C)      $1 million                                 $3 million

D)      $0                                          $1 million

Click for Answer and Explanation D)

Under U.S. GAAP, a discount of 5 percent or less is considered a safe harbor to avoid recognizing compensation expense. Since the discount is 5 percent, the stock plan is noncompensatory; thus, no compensation expense is recognized under U.S. GAAP. Under IFRS, no capital raising transaction exception exists, so the amount of discount must be recognized as compensation expense [$20 million fair value – $19 million employee contributions = $1 million]. The fact that the stock was issued from the firm’s treasury is not relevant.

3.When accounting for a tax benefit shortfall from stock-based compensation, does the shortfall increase earnings under U.S. GAAP and International Financial Reporting Standards (IFRS)?

A)       No                                      Yes

B)       Yes                                    No

C)       No                                    No

D)      Yes                                      Yes

Click for Answer and Explanation C)

A tax benefit shortfall must be recognized as an expense under IFRS whereas in the U.S., a shortfall is used first to reduce additional paid-in-capital from other tax benefits. In either case, earnings would not increase.

4.Are international financial reporting standards (IFRS) or U.S. financial reporting standards (U.S. GAAP) more flexible in accounting for tax benefit shortfalls and valuing awards with graded vesting?

A)      U.S. GAAP                           IFRS

B)      IFRS                                    U.S. GAAP

C)      IFRS                                    IFRS

D)      U.S. GAAP                           U.S. GAAP

Click for Answer and Explanation D)

All tax benefit shortfalls must be recognized as expense under IFRS whereas in the U.S., shortfalls are used first to reduce additional paid-in-capital from other tax benefits. When valuing awards with graded vesting, each segment must be valued separately under IFRS whereas in the U.S., firms can choose to value options as a single award. In both cases, U.S. GAAP provides more flexibility.