What Are the Journal Entries Required for RSUs?

This blog illustrates the journal entries for restricted stock unit awards, from grant through the vesting and release of underlying shares, including withholding a portion of the shares to cover the taxes due upon vesting.

The Scenario

Here is our fact pattern:

• RSU for 1,000 shares is granted when the fair market value is $4 per share (resulting in a total expense of $4,000).
• The RSU vests in full when the stock price is $10 per share (resulting in an aggregate taxable income and corporate tax deduction of $10,000) and the underlying stock is distributed to the participant upon vesting.
• The company's tax rate is 21%.
• The employee's tax rate is 26.45% (to keep it simple, assume the employee has paid the maximum amount of Social Security for the year and isn't subject to state income tax or the additional Medicare 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).

Recording Compensation Expense

To account for the compensation expense recognized over the period the award vests:

• Debit to compensation expense for $4,000 and a corresponding credit to additional paid-in-capital (APIC) in this same amount. This would not be a single entry but would be divided into separate entries for each interim period during the award's service period. For example, if the award were granted at the beginning of the company's fiscal year and vested at the end of the year, the company would make four separate pairs of entries for $1,000 each.

Company Tax Deduction

To account for the tax deduction the company expects to receive when the award is paid out:

• Debit to a deferred tax asset (DTA) account for $840 ($4,000 x 21%) and a corresponding credit to a deferred tax benefit (which is a tax expense account) in the same amount. This entry will reduce reported tax expense for the period in the income statement (not the company’s tax return). Same as with the compensation expense entries, this entry is divided into separate entries for each interim period.

To write off the DTA and account for the company tax deduction upon vesting of the awards and release of the underlying shares:

• Debit to deferred tax expense of $840 (the amount of the previously recorded DTA) and a credit to the DTA account of $840.

• Debit to current taxes payable of $2,100 (the tax savings the company realizes as a result of the $10,000 tax deduction), with a credit to current tax expense of $2,100.

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/Deloitte Equity Administration Survey. 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. (This is a little confusing, but in accounting speak, when dealing with the company's cash account, credits are a reduction and debits are an increase.)

Learn More

For more information on how to account for RSUs, see our Guide to Restricted Stock and Unit Plans. For more information on journal entries for all types of equity awards, see the NASPP article “Journal Entries for Stock Compensation.”