Hello, and welcome everyone to our lesson today. Today, I am going to discuss in an example that I'm going to take two versions of it, restricted stock units. It's one of the forms for stock based compensation plans that the company can use. And actually, the example will distinguish between because the accounting treatment will be different, whether the settlement of those units is going to be in stock versus cash. So we're going to take the same example and will discuss it as if the settlement will be in stock versus another version of the same example where the employees have the option to settle in cash. And that is going to be actually accounted for as a liability. Let's take a look in details on our example. As part of its stock based compensation package on January 1st, 2021, University Company or Incorporation granted restricted stock units, which we abbreviated as RSUs, representing 100,000, $1 pair common shares. The RSUs cannot be exercised until the end of 2024, which is the vesting date, and they will expire at the end of 2026. The 1$ pair common shares have a market price of 16 per share on the ground date. The fair value as of December 31st, 2021, 2022, 2023, 2024, and 2025 is given to you 16, 12, 16, 10, and 12. All recipients are expected to remain employed through the vesting date, the RSUs, all of them were exercised on June 6th, 2026 when the share price is $13. Obviously, we're going to go with the requirement to account for those throughout all those years. And the first one we are going to take is when the stock is settled, as it says here, which I'm going to change in the second version of this example. Here the RSUs are entitled to receive stock equal, I mean, the RSU holders are entitled to receive stock equal in value to the market price of those shares at exercise. So the settlement here is in stock, and in that case, then the rule is clear. We are going to account for it as equity, and actually the value of the compensation that will be determined on the grand date will not be adjusted throughout the time unless there are for features which we are not talking about. So, given that there's no for features or any expected or actual for features, then obviously, the compensation expense will not be adjusted. That is why it's going to be easy. That second thing is that at the exercise, we are not going to refer to the fair value or the market value of the stock because the compensation expense has been determined based on the grant date. OK, here you go. In the stock settled compensation on January 1st when it was granted, there's no entry that I need to. But as you can see that December 31st, 2021, 2022, 2023, and 2024, it's exactly the same thing. Because I took the $16, and I multiplied it by the 100,000 options, and I divided it because that is the compensation, the $16 is basically the market price on the grant date. How I valued the RSUs at the time of the grant, I use the market price at that time, which is the $16. And I actually divided that among the four years and the same journal entry that I accumulated for 100,000 each year. At the settlement, obviously, I will take that 1,600,000, and transfer it from the paid in capital restricted stock to the paid in capital common stock and common stock when I actually issued those shares. As you will see at the end of 2025, I already have recorded the compensation, I allocated over the vesting period. So in 2025, as you can see, there is no journal entry that needs to be done. On June 6 when they are exercise, I actually need to transfer that 1,600,000 that was in the paid in capital restricted stock. I will actually issue the shares, and that's why I credit the common stock for the pair value times the 100,000 shares that were issued because of those are used for exercise. And additional paid in capital is the additional amount that will be the difference to be credited for paid in capital, the regular common stock. Let's take the second version of it, and we change, it's the same, I know don't need to read the whole example. But in the requirement, I actually underlined what is changing, here I am giving those holders of the RSUs, the right or the option to settle in cash. And if that is the case, then it will be accounted for as a liability, and in that liability, I, Well, actually calculate the fair value of the compensation, the package on the granted, but it will be updated. So that's where in the first version we did not use all those market prices, because it was accounted for that it will be settled in stock. So I do not need to update the equity, the equity will be calculated based on the granted. But here when it's a liability then I actually will update up or down the liability, up or down, depending on the value of the price at the end of each year. You will even notice that in 2025, although the vesting period have already is over. So instead in the first version we did not do any entry in 2025, because the compensation expense was recorded, and I allocated that over the four years. Here the liability is updated even after the vesting period, until it is either expired or they were exercised. Let's take a look. On the day that I was granted those RSUs, again no entry. But on December 31st, here now that December 31st, 2021,22, 23, 24, 25, each one entry will be different depending on the market price at the end of each year. In the compensation expense, the market price of the stock was 16, so I value that package it's 1,600,000,. The vesting periods 4 years, I divide it by 4, very similar to what we did, but in the settlement with this talk. But here I credit liability instead of PIC, restricted stock, I credit liability because I'm counting for as a labor. On December 31st, 2022, now, I need to update given the new price. Now you can see the new price is 12. So the package now is no longer 1,600,000, the liability in total will be 1,200,000,. And 1,200,000 needs to be allocated over 4 years. So that's why I multiplied it by 2 over 4, that is the amount. So actually now you want to be having in your compensation expense and the liability, basically 600,000,. I already recorded in the compensation expense in the previous period 400,000. Then additionally I need to add to the compensation expense and to the liability 200,000,. Very good, what about 2023? If 2023 now I am using order, market price again went to 16. Then I need to update my liability and my compensation expense based on the market price of the stock. The 16 times 100,000, then I have a package of 1,600,000, times 3 over 4, because that in 2023 that's the third year of the vesting period. Then that is the amount that I need to recognize, okay? You already recognized 600,000, 400,000 in 2021, 200,000 in 2022. Then additionally I need 600,000, to be added into the compensation expense and into the restricted stock liability, why? Because I want the total to be 1,200,000, so you recorded 400,000 in the first year, 2021. You recorded additionally 200,000 in 2022. In 2023 I'm adding the 600,000 to make up for the 1,200,000,. What about in December 31st, 2024? Obviously, the price went down to 10. So now I need 10, the whole package of the compensation expense analyze built should be 1 million. So the 1 million times 4 over 4, because now that's the end, that's the last year of the vesting period. So I want the whole 1 million to be recorded in the compensation expense and in the liability. But actually what you have accumulated so far is 1,200,000,. As you can see, the 400,000 in the first year, the 200,000 in the second year, and the 600,000 that was just recorded in 2023. Then now the compensation expense and the liability needs to be updated downward. And that is why you're going to see the journal entry here is the reverse. The liability was debited, because you up till now you have a liability of 1,200,000. Now you want to lower it by the 200,000 to make it a total of 1 million. The same thing with the compensation expense, that is why it's credited, so that the cumulative amount of the compensation expense that was recorded over the last 4 years will be actually the 1 million. Now in 2025, although the best thing period is gone, is over, but I still need to update my liability. Because now At the end of 2025, the market price went again up to 12. So now, with the liability I need to adjust, because the package now and that's why you can see all. Because now the whole thing, 1,200,000, which is the 12 times the 100,000 RSUs need to be recorded in the liability and into the compensation expense. Based on the last Journal entry 2024, I already have recorded in my compensation expense cumulatively and in the liability 1.2 million. Because, I'm sorry 1 million only, because those are the ones that were recorded. The 400,000, the 200,000, the 600,000 and then lowering it by 200,000, making the total is 1 million. Now I need to bring it up again by the 200,000, to make the total 1.2 million. Very good. On June 6th when they were exercised those RSUs, I actually have a market price of the stock equals 13. So now I'm taking the 13 times the 100,000, times the all, because all of it has to be already recorded in the liability and in the cumulative compensation expense over the whole years. So I'm adding additional 100,000, because up till here, I have a total compensation expense recorded over the last few years. And a total that is in the liability, 1.2 million. But based on the market price today, it's the $13, then I need to increase it by 100,000, and that's why I'm doubling the compensation expense by 100,000, and credit in liability for 100,000. Now on June 6th I have only one more journal entry to record. Which is actually settling my liability. And that's why I am actually debiting the liability, getting rid of my liability and paying off the cash. Here there is no issuance of stock, as we did in the first version of the example, because here that settlement is done in terms of cash. Take away, to wrap up what I said. When the settlement is in stock, then the compensation expense is recorded based on the grand date. And no updating unless there are forfeitures, which we're going to discuss later. If it's a liability, why is it liability? Because the employees have the option to settle in cash, then it will be recorded as a liability. And the liability will be updated as we go at the end of each fiscal year. Thank you.
