CEP Financial Analysis & Reporting 3

Question 1

A company modifies a stock option by extending its expiration date. Under ASC 718, how is the incremental fair value treated?

Accepted Answer

Recognized over the remaining requisite service period of the modified award

Answer

Incremental fair value from a modification is recognized over the new requisite service period; for vested awards it is recognized immediately.

Question 2

Which financial statement disclosure is required by ASC 718 regarding the weighted-average grant-date fair value of options granted during the period?

Accepted Answer

It must be disclosed in the notes to financial statements

Answer

ASC 718 requires disclosure of the weighted-average grant-date fair value of options granted during the period in the notes to financial statements.

Question 3

How is the tax benefit from the exercise of NQSOs recorded on the company's books under current U.S. GAAP?

Accepted Answer

As a reduction of income tax expense in the period of exercise

Answer

Under ASC 718, excess tax benefits from NQSO exercises are recorded as a reduction of current income tax expense (through the income statement) in the period of exercise.

Question 4

What is the primary purpose of the diluted EPS calculation in the context of equity compensation?

Accepted Answer

To reflect the potential dilutive effect of outstanding stock options, RSUs, and other equity awards

Answer

Diluted EPS incorporates the potential dilutive impact of equity awards (options, RSUs, etc.) on the weighted-average shares outstanding using the treasury stock method.

Question 5

Under the treasury stock method for diluted EPS, proceeds assumed from option exercises are used to:

Accepted Answer

Repurchase shares at the average market price during the period

Answer

The treasury stock method assumes proceeds from option exercises are used to repurchase shares at the average market price, with only the net incremental shares included in diluted EPS.

(CEP) Certified Equity Professional Practice Test

(CEP) Certified Equity Professional Practice Test

CEP Financial Analysis & Reporting 3