Answer the following questions from Professional Research, FASB Codification. Ci

Question

Answer the following questions from Professional Research, FASB Codification. Cite the paragraphs where you found these answers.

a. In your own words, discuss the objectives for accounting for stock compensation.

b. What is role of fair value measurement for stock options?

c. Pet Smart has restricted stock awards to executives. Explain the proper accounting for these. Using the Codification, how should Pet Smart measure non-vested restricted shares on the grant date? What about vested restricted shares?

Explanation / Answer

a. According to FASB ASC 718-10-10 (Compensation- Stock Compensation, Overall, Objectives), theobjective of accounting for transactions under share-based payment arrangements with employees is torecognize in the financial statements the employee services received in exchange for equity instrumentsissued or liabilities incurred and the related cost to the entity as those services are consumed.This Topic uses the terms compensation and payment in their broadest senses to refer to the consideration paid foremployee services.

In sub-section 10-2, fair value is established as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fairvaluebased measurement method in accounting for sharebased payment transactions with employees except for equity instruments held byemployee stock ownership.

b.

1. Application of the highest and best use and valuation premise concepts. The amendments specify that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when 2 measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or of liabilities. The Board decided that the highest and best use concept is not relevant when measuring the fair value of financial assets or the fair value of liabilities because such items do not have alternative uses and their fair values do not depend on their use within a group of other assets or liabilities. Before those amendments, Topic 820 specified that the concepts of highest and best use and valuation premise were relevant when measuring the fair value of assets, but it did not distinguish between financial and nonfinancial assets. The Board concluded that the amendments do not affect the fair value measurement of nonfinancial assets and will improve consistency in the application of the highest and best use and valuation premise concepts in a fair value measurement. The amendments might affect practice for some reporting entities that were using the in-use valuation premise to measure the fair value of financial assets, as described below in the section “Measuring the fair value of financial instruments that are managed within a portfolio.”

2. Measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity. The amendments include requirements specific to measuring the fair value of those instruments, such as equity interests issued as consideration in a business combination. Those amendments are consistent with the requirements for measuring the fair value of liabilities and specify that a reporting entity should measure the fair value of its own equity instrument from the perspective of a market participant that holds that instrument as an asset. Before those amendments, Topic 820 stated that the definition of fair value should be applied to an instrument measured at fair value that is classified in shareholders’ equity, but it did not contain explicit requirements for measuring the fair value of such instruments. The Board concluded that including requirements on how to apply the principles of Topic 820 when measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity will improve consistency in application and will increase the comparability of fair value measurements among reporting entities applying U.S. GAAP or IFRSs. The Board does not expect those amendments to affect current practice. 3. Disclosures about fair value measurements. The amendments clarify that a reporting entity should disclose quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy.

3 The Board concluded that those amendments do not change the objective of the requirement but that explicitly requiring quantitative information about unobservable inputs will increase the comparability of disclosures between reporting entities applying U.S. GAAP and those applying IFRSs. The amendments in this Update that change a particular principle or requirement.

c.

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