After studying this chapter, you should be able to:

  1. 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities.
  2. 2 Explain the accounting for convertible preference shares.
  3. 3 Contrast the accounting for share warrants and for share warrants issued with other securities.
  4. 4 Describe the accounting for share compensation plans.
  5. 5 Discuss the controversy involving share compensation plans.
  6. 6 Compute earnings per share in a simple capital structure.
  7. 7 Compute earnings per share in a complex capital structure.

Kicking the Habit

Some habits die hard. Take share options—called by some “the crack cocaine of incentives.” Share options are a form of compensation that gives key employees the choice to purchase shares at a given (usually lower-than-market) price. For many years, companies were hooked on these products. Why? The combination of a hot equity market and favorable accounting treatment made share options the incentive of choice. They were compensation with no expense to the companies that granted them, and the share options were popular with key employees, so companies granted them with abandon. However, the accounting rules that took effect in 2005 required expensing the fair value of share options.

This new treatment has made it easier for companies to kick this habit. As shown in the chart on the left, a review of option ...

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