Module 2 (Employee Compensation) Knowledge Check on Effect of RSU Awards on the Financial Statements

CFA Level II FRA
#1

This question is in respect of Module 2 (Employee Compensation: Post Employment and Share Based), Knowledge Check on Effect of RSU Awards on the Financial Statements, Question 1.

Why is JPY33,254 million transferred from the share-based compensation reserve to the paid-in capital account in the year ended 31 Dec 20X3? Shouldn’t only the RSUs granted on 1 January 20X1 be settled (i.e. JPY19,803 million) as the other RSUs have not completed their 3 year vesting period from their grant?

#2

I agree.

At the end of year 3 we should 19,803 transfer from Share based comp reserve to paid in capital, reflect the RSUs granted in year 1.

#3

Thanks!

#4

I sent an errata. YOu never know I may hear back before your exam

#5

Thanks. Another errata I found - in the answer to q10 of the practice problems, [(41270-38700) * 0.07] is 179.9, not 211. The sum of the 2 components would be 499.9.

#6
#7

I was confused with the RSUs’ accounting treatment on Curri after having read the related information. On page #74, CFAI said “When RSUs vest, settlement occurs automatically”. So why don’t they just transfer the whole RUSs vested to the common stock and paid in capital instead of using “Share-based compensation reserve” as an intermediate account for accruing (Knowledge check: effect of RSU Award…)?

Furthermore, if you read the pack of questions from Q13 to Q19, you will see that the solutions are based on the basis that all RSU would be settled immediately as incurred.

So I don’t know which is the most appropriate way of accounting treatment.

#9

So I think there is confusion in terminology in the question and what should be happeniing.

I think
The expense of the stock options should be taken over the service period. Oftern service period and vesting are the same but the Knowledge Check on Effect of RSU is unclear.

The text says: “The RSUs vest in three years,”
to me this means that you are not entitled to the RSU unit you have worked for 3 years. So we a have service period of 3 years and then the RSUs vest.
This would match with the treatment of taking the income expense and the balancing item being share based compensation.

But then in the table one of the colums “C” has “vesting per year” which suggests a 1/3rd vest each year. In which case I think we should see the income statement expense go straight to paid in capital as the employee has the options.

Either way “balance sheet” row is incorrect.

Q13 tto Q18 is different as the RSU vest immediately.

I have used the following to try and understand the approach taken

with : "EXAMPLE SC 2-3 Award with performance conditions " showing how the expense should be taken over the service period even if the options have a “cliff face” service conidition.

#10

I understand that the term “Vesting” here is equivalent to the term “Accruing” in accounting, and only at the “Settlement date”, we will transfer RSUs in reserve balance to common share & paid-in capital. For RSUs, they have the characteristic that “Vesting and Settling occur simultaneously”.

Please let me know if my understanding is appropriate

Thank u so much!

#11

This is how i think about it.

Vesting is when you receive rights to the benefit.
With pension yu work another year are intitled to the extra beneifit.

The issues with RSU is therre can be conditions to vesting such as length of service. If you don’t work 3 years you do not get to vest.

I grant you RSU but you need to work here to get any.
As your “service” with firm goes on the probablity of you investing increases. Booking the cost of the RSU over the service period is accuriing the costover time but also reflecting the chance of vesting.
This is what we see the knowledge check question.

In the EOC question there seems to be no condition to vesting. As you you work you are entitled to more RSU so there they are charegd as the are given.

I think like the difference.
I will give you $1m for year you work for me for 10 years. Each year you work $1m cash goes out.

I will give you a $10m payment if you work for me for 10 years. Nothing if you work less. I accure a cost of $1m a year and alincreasing liability on the balance sheet to reflect the chance of giving you $10m. But the cash does not go out until year 10.