RSUs and Your General Ledger--Part 2

Journal Entries for RSUs--Part 2

Last week I reviewed the journal entries necessary to account for compensation expense related to RSUs and the company's tax deduction.  This week, I finish up this topic by looking at the journal entries to account for the issuance of shares when the award vests and shares are withheld to cover the employee's tax obligation. 

The Scenario

To refresh your memory, here is the scenario that we are working with:

An RSU for 1,000 shares is granted when the FMV is $4 per share. The RSU vests in full when the FMV is $10 per share (resulting in an aggregate taxable gain/tax deduction of $10,000) and is paid out upon vesting. The employee's combined tax rate is 26.45% (to keep it simple, assume the employee is maxed on Social Security and isn't subject to state income tax). The total tax withholding on the release is $2,645. The shares withheld will be rounded up to 265 shares, resulting in an issuance of 735 shares. The excess withholding will be deposited with the employee's federal tax payment. The stock has a par value of $.01 (this is very important--the journal entries for a no par stock are slightly different).

Share Issuance and Withholding

To account for the issuance of stock and share withholding upon vest:

• The company records a credit to common stock for $10 (1,000 shares x $.01 par value) for the shares issued upon vesting. At the same time, the company records a debit to common stock in the amount of $2.65 (265 shares x $.01) for the shares that are withheld to cover the taxes. The net result of these two entries is an increase to common stock of $7.35 (which corresponds to the net shares issued upon vesting).
• The company records a credit to current taxes payable of $2,650 (this is the employee's tax liability, including the excess for the fractional share that was rounded up).
• The company records a debit to APIC for $2,657.35. This is the offsetting entry that balances the above three entries. To calculate it, add up all the credits, and then subtract all the debits. It represents the par value for the net shares issued and the tax withholding. These amounts come out of APIC because they aren't paid in cash.

The Fractional Share

How the company handles the fractional share that results when shares are withheld to cover the taxes can impact the above entries. I went with the scenario that is most common according to the NASPP's 2007 Domestic Stock Plan Design and Administration Survey (co-sponsored by Deloitte). Here's how the entries might differ if the company handles the fractional share differently:

• If the shares withheld are rounded down, the employee will have make up the difference in cash (usually accomplished through payroll withholding). This will show as a debit to cash and the debit to APIC is reduced accordingly.
• If the shares withheld are rounded up and the excess payment is refunded to the employee, this will show as a credit to cash. (In accounting speak, when dealing with the company's cash account, credits are a reduction and debits are an increase. I am certain the accountants do this just to keep us English majors completely confused--it's probably revenge because we got to take more interesting courses in college. I don't care; I'm still glad I was an English major.)

 Correction: Math Error in Last Week's Entry

One reason I was an English major is because I am severely mathematically challenged, even when using a calculator.  This was proven out by last week's blog entry, in which I managed to multiple $4,000 by 40% and come up with $1,000.  The correct debit to deferred tax expense (and credit to the DTA account) to write off the deferred tax asset should have been $1,600.  This error also caused the amounts in the subsequent entries to be incorrect.

If you read the blog entry early on--before Tim Oakes of Curtis Consulting Group was kind enough to help me with my math--and were confounded by the math, I've since corrected it. The entries should make infinitely more sense now.