Question

Microsoft provides compensation to executives in the form of a variety of incentive compensation plans, including restricted stock award grants. The following is an excerpt from a disclosure note from Microsoft’s 2015 annual report:

Real World Case 19–1

Restricted stock awards; Microsoft ● LO19–1

Real World Financials

Broaden Your Perspective

Shares ($ in millions)

Weighted Average GrantDate Fair Value

Stock awards: Nonvested balance, beginning of year 259 $ 27.88 Granted 75 42.36 Vested (94) 27.47 Forfeited

   (24) 31.81 Nonvested balance, end of year 216 $32.72

Note 20 Employee Stock and Savings Plans (in part) Stock awards are grants that entitle the holder to shares of common stock as the award vests. Our stock awards generally vest over a five-year period . . . During fiscal year 2015, the following activity occurred under our plans:

Required:

1. What is the “incentive” provided by Microsoft’s restricted stock grants?

2. If all awards are granted, vested, and forfeited evenly throughout the year, what is the compensation expense in fiscal 2015 pertaining to the previous and current stock awards? Explain. Assume forfeited shares were granted evenly throughout the three previous years.

Answer 1

1. Restricted Stock Award Plan:

Under restricted stock award plan the employer grants stock options, warrants and rights to the company’s key executives under certain conditions. Restricted stock award plans are subjected to certain conditions laid down by the employer at the time of grant. If the conditions in the stock award plan are violated then the restricted stock plans will be forfeited.

Usually restricted stock awards are granted to executives on a set of given conditions which have to be satisfied by the employees like the net income of the company must exceed the previous year’s net income by not less than 20% or the executive must remain with the company till the end of the financial year 2016, or the volume of sales must be increased by 30% compared to the previous year’s sales etc.

Restricted stocks become available to the employees under a period of graded vesting schedule which lasts for several years. After the period of graded vesting the stocks become invalid.

2. Microsoft has awarded restricted stock incentive compensation plan to its executives

Total compensation

= 75 million * $42.36

= $3,177 million

If all the stock awards are granted, vested and forfeited evenly throughout the year

= 259 million * $27.88

= $7,220.90 million

= $7,220.90 / 3

= $2,406.97 million

Compensation expense for each of the 3 year is $2,406.97 million.