Wiley GAAP 2008

Application of FAS 150

Example 1: Obligations that require net share settlement‐monetary value changes in the same direction as the fair value of the issuer's equity shares

Tyler Corp. grants 10,000 stock appreciation rights that entitle the holder to receive a number of equity shares to be determined based on the change in the fair value of Tyler's equity shares. At the date of the grant, the fair value of Tyler's equity shares is $25 per share. Subsequently, the fair value of Tyler's equity shares increases to $28 per share. Tyler is thus required to issue shares worth $30,000 [($28 ‐ $25) × 10,000], or 1,072 shares.

This financial instrument contains an obligation to issue a number of equity shares with a value equal to the appreciation of 10,000 equity shares. The number of shares to be issued, therefore, is not fixed. Classification will depend on whether the monetary value changes in the same direction as changes in the fair value of the equity shares. In this example, the monetary value changes in the same direction as changes in the fair value of the equity shares.

The increase in fair value of the equity shares from $25 to $28 resulted in an increase in the monetary value of the obligation from $0 to $30,000. If the fair value of the equity shares increases further, for example to $30 per share, the monetary value of the obligation increases as well to $50,000 [($30 ‐ $25) × 10,000]. If the fair value of the equity shares then decreases, for example from $30 to $27, the ...