is stock bonus plans, where the granting of shares is
contingentonthefirmreaching aspecifiedoperatingtarget
such as doubling of revenues, 20 percent growth in net
income, and so on.
Accounting for Restricted Stock
The accounting rules that govern restricted stock have
remained relatively stable over time, unlike the rules for
employee compensation. When a restricted stock issue is
made,firmshavetoestimatethevalueoftherestrictedstock
andtreatitasacompensationcost.Likeemployeeoptions,
thevalue oftherestrictedstock isspread over thevesting
period.Forinstance,arestrictedstockgrantwithafour-year
vesting period and an estimated value of $1 million will
createanaccountingexpenseof$250,000eachyearforthe
next four years.
In making the estimation of the value of restricted stock,
firms areallowedto factorin boththeprobability thatthe
employee will forfeit (by leaving the company) and the
illiquidity of theshares, and discounttheobserved market
price. Quoting the FASB:
Restrictedsecuritiesareoftenpurchasedata discountfrom
thequotedpriceofotherwiseidenticalunrestrictedsecurities,
reflecting the lack of liquidity relating to the inability to
access that market for the specified period. Therefore, in
estimatingthefairvalueof restrictedsecurities, thequoted
priceofanotherwiseidenticalunrestrictedsecurityshallbe
adjustedfortheeffectoftherestriction,consideringfactors
suchasthenatureanddurationoftherestriction,thevolatility
of the unrestricted security, and the risk-free interest rate.