Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

What are stock rights? How does the issuing company account for them?

Short Answer

Expert verified

Stock rights give a stockholder the choice of buying additional stock at a price below the current market price for a specified period. This type of issue gives existing shareholders securities called rights; the shareholders can purchase new shares at a discount to the market price on stated futures.

Step by step solution

01

Understanding the concept of Stock rights

Stock rights give their proprietor the right, however, not the commitment to purchase the portions of an organization at a particular exercise cost for an assigned period. The term fundamentally applies to giving current investors the option to purchase extra offers as a feature of the guarantor's next stock deal.

02

Issuing company accounts stock right

A right offering (rights issue) is a group of rights proposed to existing investors to buy extra stock offers, known as membership warrants, in relation to their current possessions. This is a choice since it gives an organization's investors the right, yet not the commitment, to buy extra offers in the organization.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Explain the treasury-stock method as it applies to options and warrants in computing dilutive earnings per share data.

Anazazi Co. offers all its 10,000 employees the opportunity to participate in an employee share-purchase plan. Under the terms of the plan, the employees are entitled to purchase 100 ordinary shares (par value \(1 per share) at a 20% discount. The purchase price must be paid immediately upon acceptance of the offer. In total, 8,500 employees accept the offer, and each employee purchases on average 80 shares at \)22 per share (market price \(27.50). Under IFRS, Anazazi Co. will record:

(a) no compensation since the plan is used to raise capital, not compensate employees.

(b) compensation expense of \)5,500,000.

(c) compensation expense of \(18,700,000.

(d) compensation expense of \)3,740,000.

E16-30 (L06) (Stock-Appreciation Rights) Capulet Company establishes a stock-appreciation rights program that entitles its new president Ben Davis to receive cash for the difference between the market price of the stock and a pre-established price of \(30 (also market price) on December 31, 2013, on 30,000 SARs. The date of grant is December 31, 2013, and the required employment (service) period is 4 years. President Davis exercises all of the SARs in 2019. The fair value of the SARs is estimated to be \)6 per SAR on December 31, 2014; \(9 on December 31, 2015; \)15 on December 31, 2016; \(6 on December 31, 2017; and \)18 on December 31, 2018.

Instructions

(a) Prepare a 5-year (2014โ€“2018) schedule of compensation expense pertaining to the 30,000 SARs granted president Davis.

(b) Prepare the journal entry for compensation expense in 2014, 2017, and 2018 relative to the 30,000 SARs.

Which of the following statements is correct?

a) IFRS separates the proceeds of a convertible bond between debt and equity by determining the fair value of the debt component before the equity component.

b) Both IFRS and GAAP assume that when there is a choice of settlement of an option for cash or shares, share settlement is assumed.

c) IFRS separates the proceeds of a convertible bond between debt and equity, based on relative fair values.

d) Both GAAP and IFRS separate the proceeds of convertible bonds between debt and equity.

CA16-4 WRITING (Stock Compensation Plans) The following two items appeared on the Internet concerning the GAAP requirement to expense stock options.

WASHINGTON, D.C.โ€”February 17, 2005 Congressman David Dreier (Rโ€“CA), Chairman of the House Rules Committee, and Congresswoman Anna Eshoo (Dโ€“CA) reintroduced legislation today that will preserve broad-based employee stock option plans and give investors critical information they need to understand how employee stock options impact the value of their shares.

โ€œLast year, the U.S. House of Representatives overwhelmingly voted for legislation that would have ensured the continued ability of innovative companies to offer stock options to rank-and-file employees,โ€ Dreier stated. โ€œBoth the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) continue to ignore our calls to address legitimate concerns about the impact of FASBโ€™s new standard on workersโ€™ ability to have an ownership stake in the New Economy, and its failure to address the real need of shareholders: accurate and meaningful information about a companyโ€™s use of stock options.โ€

In December 2004, FASB issued a stock option expensing standard that will render a huge blow to the 21st century economy,โ€ Dreier said. โ€œTheir action and the SECโ€™s apparent lack of concern for protecting shareholders, requires us to once again take a firm stand on the side of investors and economic growth. Giving investors the ability to understand how stock options impact the value of their shares is critical. And equally important is preserving the ability of companies to use this innovative tool to attract talented employees.โ€

โ€œHere We Go Again!โ€ by Jack Ciesielski (2/21/2005, http://www.accountingobserver.com/blog/2005/02/here-we-go-again) On February 17, Congressman David Dreier (Rโ€“CA), and Congresswoman Anna Eshoo (Dโ€“CA), officially entered Silicon Valleyโ€™s bid to gum up the launch of honest reporting of stock option compensation: They co-sponsored a bill to โ€œpreserve broad-based employee stock option plans and give investors critical information they need to understand how employee stock options impact the value of their shares.โ€ You know what โ€œcritical informationโ€ they mean: stuff like the stock compensation for the top five officers in a company, with a rigged value set as close to zero as possible. Investors crave this kind of information. Other ways the good Congresspersons want to โ€œhelpโ€ investors: The bill โ€œalso requires the SEC to study the effectiveness of those disclosures over three years, during which time, no new accounting standard related to the treatment of stock options could be recognized. Finally, the bill requires the Secretary of Commerce to conduct a study and report to Congress on the impact of broad-based employee stock option plans on expanding employee corporate ownership, skilled worker recruitment and retention, research and innovation, economic growth, and international competitiveness.โ€

Itโ€™s the old โ€œfour cornersโ€ basketball strategy: stall, stall, stall. In the meantime, hope for regime change at your opponent, the FASB.

Instructions

(a) What are the major recommendations of the stock-based compensation pronouncement?

(b) How do the provisions of GAAP in this area differ from the bill introduced by members of Congress (Dreier and Eshoo), which would require expensing for options issued to only the top five officers in a company? Which approach do you think would result in more useful information? (Focus on comparability.)

(c) The bill in Congress urges the FASB to develop a rule that preserves โ€œthe ability of companies to use this innovative tool to attract talented employees.โ€ Write a response to these Congress-people explaining the importance of neutrality in financial accounting and reporting.

See all solutions

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free