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Unformatted text preview: and satisfied any
other condition necessary to earn the right to benefit from the instruments
(SFAS 123, par 17).
The fair value of stock option (or its equivalent) granted by a public company
shall be estimated using an option-pricing model that takes into account as of
the grant date the exercise price and expected life of the option, the current
price of the underlying stock and its expected volatility, expected dividends on
the stock, and the risk-free interest rate for the expected term of the option
(SFAS 123, par. 19).
A non-public company shall estimate the value of its options based on the same
factors as described for public entities, except that a non-public company need
not consider the expected volatility of its stock over the expected life of the
option (SFAS 123, par. 20).
Usually it is possible to estimate the fair value of most stock options and other
equity instruments at the date they are granted. Otherwise, the final measure of
the compensation cost shall be the fair value based on the stock price and other
performance factors at the first date at which it is possible to reasonably
estimate that value. Estimates of compensation cost for periods during which it
is not possible to determine the fair value shall be based on the current intrinsic
value of the award (SFAS 123, par. 22).
The compensation cost recognised for the award of stock–based employee
compensation shall be based on the number of instruments that eventually vest.
No compensation cost is recognised for awards that employees forfeit either
because they fail to satisfy a service requirement for vesting, such as for a fixed
35 award, or because the company does not achieve a performance condition
(SFAS 123, par. 26).
A company may choose at the grant date to base accruals of the compensation
cost on the best available estimate of the number of options or other equity
instruments that are expected to vest and to revise that estimate, if necessary, if
subsequent information indicates that actual forfeitures are likely to differ from
initial estimates. Alternatively, a company may begin accruing compensation
cost as if all instruments granted that are subject only to a service requirement
are expected to vest. The effect of actual forfeitures would be then recognised
as they occur (SFAS 123, par. 28).
The compensation cost for an award of equity instruments to employees shall
be recognised over the period(s) in which the related employee services are
rendered by a charge to compensation cost and a corresponding credit to equity
if the award is for future services. If the service period is not defined as an
earlier or shorter period, the service period shall be presumed to be period from
the grant date to the date that the award is vested and its exercisability does not
depend on the continued employee service. If the award is for past services, the
related compensation cost shall be recognised in the period in which it is
granted (SFAS 123, par. 30).
The employer is required to include certain disclosures about stock-based
employee compensation arrangements in its financial statements regardless of
the chosen accounting method. A company shall provide a description of the
plan(s), such as vesting requirements, the maximum term of options granted,
and the number of the shares authorised for grants of options or other equity
instruments (SFAS 123, par. 45). 3.10 Examination of FASB Statement No. 148 “Accounting for
Stock-Based Compensation – Transition and Disclosure”
On October 4, 2002, FASB issued an Exposure Draft called “Accounting for
Stock-Based Compensation – Transition and Disclosure”, which was an
amendment of SFAS 123. On December 31, 2002, FASB published SFAS No.
148 “Accounting for Stock-Based Compensation – Transition and Disclosure”
(www.fasb.org/news/nr123102.shtml). SFAS 48 is based on the ED.
Further we look into two main parts of this Statement: Amendment to
Transition Provisions and Amendment to Disclosure Provisions.
SFAS 123 required companies, which adopted the fair value based method, to
apply this method prospectively for new share options granted. This caused a
36 so-called “ramp-up” effect on reported compensation cost, which worried both
companies and investors as there was no consistency in the reported results.
However, FASB was concerned that retroactive application of the fair value
method would be troublesome for financial statement preparers as the historical
assumptions necessary for establishing the fair value of shares or options
granted before the introduction of SFAS 123 were not readily available. In
order to assist companies willing to apply the fair value for measuring shares or
options granted, SFAS 148 provides two more methods of transition. Both
methods eliminate the ramp-up effect by including company’s stock-based
compensation expense immediately upon adoption. At present, if the company
decides to adopt the fair value method of accounting for share option plans, the
amendment to Transition Provisions, paragraph 52 of SFAS 123, allows the
three following alternatives:
a. b. c. “The company can apply the fair value based method of...
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This document was uploaded on 10/31/2013.
- Fall '13