Hello, and welcome everyone. In this lesson, we will discuss the accounting treatment for the first type of those stock-based compensation that we will handle, which are restricted stock awards or units. Executive compensation sometimes include a grant of shares of stock, or the right to receive shares. Usually such shares are restricted in such a way as to provide some incentive to the recipient in the future. Typically restricted stock award plans are tied to continued employment. The two primary types of restricted stock plans are; restricted stock awards versus restricted stock units. Let's take a brief look at each one of them. Let's start with the restricted stock awards. In a restricted stock awards, shares are awarded in the name of the employee, although the company might retain the physical possession of the shares. The employee has all rights of a shareholder, subject to certain restrictions or forfeiture. Ordinarily, the shares are subject to forfeiture by the employee if they employment is terminated within some specified number of years from the date of the grant. The employee usually is not free to sell the shares during the restriction period, and a statement to that effect often is inscribed on the stock certificate itself. These restrictions give the employee incentive to remain with the company until the rights to the shares vest. The compensation associated with the share of restricted stock is the market price at the grant date over an unrestricted share of the same stock. This amount is accrued as compensation expense with a credit to the paid-in capital in the name of restricted stock, over the service period for which participants received the shares, usually from the date of the grant to when the restrictions are lifted, the end of the vesting date or the vesting period. Once the shares vest and the restrictions are lifted, paid-in capital restricted, the one that we credit before, is replaced by a common stock and paid-in capital in excess of pair. Now the regular one, now I'm saying that they are the normal, not restricted anymore. Any market price changes that might occur after that don't affect the total compensation at all. That is on the awards. An increasing popular variation of the restricted stock awards is what we referred to as restricted stock units, or RSUs in abbreviation. In fact, RSUs have become a much more popular form of compensation than restricted stock awards. A restricted stock unit is a right to receive a specified number of shares of common stock. The employee doesn't receive the stock right away. Instead, the shares are distributed as the recipient of the RSUs satisfies the vesting requirement. Like restricted stock awards, the recipient benefits by the value of the shares at the end of the vesting period. But unlike the restricted stock awards, the shares are not issued at the time of the grant. Delaying the increase in outstanding shares is more acceptable to some shareholders. The terms of the RSUs may vary. Sometimes the recipient is given the cash equivalent of the number of shares used to value the RSUs. Or the terms might stipulate that either the recipient or the company is allowed to choose whether to settle in stock or cash. This is extremely important issue because if it's settled in stock and will be treated as equity, if it's settled in cash, it will be treated as a liability. Although RSUs delay the issuance of the shares and avoid some administrative complexities of outright awards of restricted stock, accounting for RSUs to be settled in stock is essentially the same as for restricted stock awards. The case that I'm concerned about that I want to warn, is when the employee has the right to settle in cash. Because if the employee will receive cash or can elect to receive cash, we consider there were to be a liability rather than equity. When an RSU is considered to be a liability, we determine its fair value at the grant date and recognize that amount as compensation expense over the requisite service period consistent with the way we account for restricted stock awards, RSUs and other share-based compensation. However, because these plans are considered to be liabilities payable in cash, the credit portion of the entry as we recognize compensation expense each year is to liability and designated restricted stock. It's necessary to periodically adjust the liability and the corresponding compensation based on the change in the stock's fair value until the liability is settled. If restricted stock shares or RSUs are forfeited because say, the employee leaves the company, entries previously made related to that specific employee will be simply reversed. This would result in a decrease in compensation expense in the year of forfeiture, but the total compensation also has to be adjusted for the forfeited amount, which is then allocated over the remaining service period. We will discuss that in details in future lessons. How to reverse, and how to do the reallocation of that process for the forfeiture that happen. In conclusion to our today's lesson, the distinction between the share-based awards that are considered equity and those that are considered liability, is based on whether the employer is obligated to transfer assets to the employee. For example, a cash RSU, which is settled RSU in terms of cash, requires the transfer of assets and therefore is a liability. While a restricted stock award on the other hand, is an equity instrument since it requires only the issuance of stock and no settlement in cashing. Thank you very much.
