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SAT case 15-1-power Point-2010
Course: ACCT 5120, Spring 2010School: UCM
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Word Count: 726
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Requiresthatcompaniesrecognizecompensationexpense SFASNo.123(R)December2004 usingthefairvaluemethod. Fairvalueofcompensationistheassumedvalueofthe servicesreceived. Fairvaluesatdateofgrant(dateoptionsarereceived)can befoundusingacceptableoptionpricingmodels,suchas theBlackScholesoptionpricingmodelorthebinomial latticemodel. Bothmodelsusesamebasicinputs:underlyingstockprice,...
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Requiresthatcompaniesrecognizecompensationexpense
SFASNo.123(R)December2004
usingthefairvaluemethod. Fairvalueofcompensationistheassumedvalueofthe servicesreceived. Fairvaluesatdateofgrant(dateoptionsarereceived)can befoundusingacceptableoptionpricingmodels,suchas theBlackScholesoptionpricingmodelorthebinomial latticemodel.
Bothmodelsusesamebasicinputs:underlyingstockprice,
riskfreerateofinterest,strikeprice,dividendyield,volatility ofcompanysstockprice,andexpectedtermoftheoption.
Noentryatdateofgrant Totalfairvalueofcompensationexpenseis allocatedevenlyovertheserviceperiod,orperiod fromwhichtheexpectedbenefitwilloccur. Dr.CompensationExpense XXX Cr.PaidinCapitalStockOptionsXXX
Stockoptionsareobligationstoissueacompanys stockinthefuture
SFACNo.6describesliabilitiesasobligationstotransfer assetstoanotherentityinthefutureasaresultofapast transaction. Therefore,sincestockoptionplansareanobligationto issueequity,notassets,stockoptionsdonotmeetthe definitionofaliability Classificationdependsonwhetheritsanobligationto transferassetsortherelationshipisdeemedtobean ownershiprelationship.
SFASNo.150requiresthatcertainobligationsthat couldbesettledbyissuanceofanentitysequity securitiesbeclassifiedasliabilities.
Onlyreasonstockoptionsarenotincludedasliabilitiesis becausetheydontmeettheSFACNo.6definitionofa liability.FASBexpectstoamendConceptsStatement6 toeliminatethatinconsistency.
Obligationtotransferstocksatexercisepricelowerthan themarketpriceisaliability. ThiswillcauseapotentiallydilutiveeffectontheEPSof theallofthecommonstockasthereareadditional stockholderclaimsagainstthesameamountofincome.
Highcompensationexpenseshurtcompaniesbottom linesMerrillLynchstudyreportedifallESOPs Highcompensationexpensesresultinadecreaseduse wereexpensed,reportedprofitswouldfallby10% ofESOPs Smallcompaniesatdisadvantageagainstlarge companies
TalentedemployeesmaydesireESOPs
Manysmallcorporationsrelyontheabilitytoofferstock optionplansinplaceofotherformsofcompensation recordingcompensationexpensesdefeatsthispurpose Largercorporationsarentaffectedasdramatically
Employeestockoptionplansarecompensationthatrequire expensing Portraysamoreaccuratepictureoffinancialpositionand operationstoinvestors Earningsareoverstatedsamestudyreallyshowsthat earningsareoverstatedby10%whennotexpensed Potentiallyincreasesgrowthinstockvalue
Before2004,whencompaniescouldchoosetousefairvalueor intrinsicmethod,somecompaniesvoluntarilychosetousethefair valuemethod
Investorsshoweditsapprovalofthistransparentreportingasmany
Providesmatching
companiesstockpricesincreased,evenafteradecreaseinearningsper share
APBOpinionNo.25thedifferencebetweenthe marketvalueandtheoptionrepresentsopportunity costandemployeecompensations Providesthemostaccuratevalueofthe compensationexpensenoestimatesusingmodels ShouldstillrecordfairvalueofESOPatgrantdate ascompensationexpense Providesmatching
OnJan.1,2000,acompanyissuesstockoptionsto purchase1,000sharesofcommonstock,$1par. Thefairvalueoftheoptionsatthegrantdateis $60,000,withanexercisepriceof$70. Theserviceperiodis3years. TheoptionsareexercisedonJan1,2003whenthe marketpricepershareis$140.
Jan.1,2000Noentry Dec.31,2000,2001,and2002 CompensationExpense PICStockOptions Jan.1,2003Optionsexercised CompensationExpense Cash PICStockOptions PICStockOptions(MV) CommonStock
$20,000 $20,000 $10,000 $70,000 $60,000 $139,000 $1,000
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