Share-based compensation refers to a form of compensation provided by a company to its employees or executives in the form of equity instruments such as stock options, restricted stock units (RSUs), or shares of the company's stock. This type of compensation aligns the interests of employees with those of shareholders, as it incentivizes employees to contribute to the company's growth and success, leading to increased shareholder value.

Key Points:

Stock Options: Stock options grant employees the right to purchase a specified number of company shares at a predetermined price, known as the exercise or strike price, within a certain period of time.

Restricted Stock Units (RSUs): RSUs are units representing an ownership interest in the company's stock that are granted to employees, subject to certain vesting conditions. Once vested, employees receive the shares outright.

Accounting Treatment: The accounting treatment for share-based compensation varies depending on the type of equity instrument granted and whether it has performance or service conditions attached. Generally, companies are required to recognize the fair value of share-based awards as an expense on their income statement over the vesting period, with a corresponding increase in equity.

Fair Value Measurement: The fair value of share-based awards is typically determined using valuation models such as the Black-Scholes model for stock options or market-based approaches for RSUs. The fair value is measured on the grant date and adjusted for any changes in the expected vesting period or forfeiture rates.

Disclosure Requirements: Companies are required to disclose information about their share-based compensation plans in the notes to their financial statements, including the terms and conditions of the awards, the methods used to determine fair value, and the total compensation expense recognized in each period.

Objective Type Question:

What is the accounting treatment for share-based compensation?

A) Recognition of the fair value of share-based awards as an expense over the vesting period B) Recognition of the fair value of share-based awards as revenue in the period of grant C) Recognition of the exercise price of stock options as an expense in the period of grant D) Recognition of the fair value of share-based awards as an asset on the balance sheet