This preview shows page 1. Sign up to view the full content.
Unformatted text preview: k
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized in the company's financial statements.
Pro forma information is required by SFAS 123 as if the company had
accounted for its employee stock options under the fair value method. So the
company provides the information on the fair value of options granted in 2001
estimating the value of employee stock options at the date of grant and using
the Black-Scholes option-pricing model. 78 For purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting periods. Net income for the year
2001 after applying SFAS 123 amounted to 254 million U.S.dollars while the
reported net income amounted to 1,291 million U.S.dollars.
Intel Corporation emphasizes that the Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the company's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in the opinion of management, the existing models do not
necessarily provide a reliable single measure of the fair value of employee
4.5.9 JPMorgan Chase & Co
In 1993 JPMorgan Chase & Co (JP Morgan Chase) opposed the Exposure
Draft “Accounting for Stock-Based Compensation” as not improving the
quality and credibility of financial statements. However, the company started
expensing employee stock options from January 2003.
JPMorgan Chase accounts for its employee stock-based compensation plans
under the intrinsic value based method in accordance with APB 25. There is no
expense recognized for stock options, as they have no intrinsic value on the
grant date. Following the requirements of SFAS 123, the company provides pro
forma effects the stock options would have on the income statement had the
employee stock-based compensation expense been recognized using the fair
value based method (www.ar.jpmorganchase.com/ar2001/audited/n19.html).
JPMorgan Chase stated that if the company had adopted the fair value based
method pursuant to SFAS 123, options would be valued using the BlackScholes model. The higher impact from applying SFAS 123 in 2001 reflects the
lower level of net income and increased options granted during 2001. The
difference between net income as reported and after the impact of applying
SFAS 123 is significant and amounted to 0,622 million USD. Under APB 25
net income amounted to 1,694 million USD, while if the company recorded
stock-based compensation expense using the fair value based method, net
income would be 1,072 million USD. JPMorgan Chase stated that it used
weighted-average grant-date fair value and assumptions to value the options
using the Black-Scholes model for equity awards granted. 79 JPMorgan Chase announced that the company is going to start to expense all
stock options granted to employees beginning January 2003. This will have a
somewhat larger impact on JPMorgan Chase than on some other firms because
the company is one of the few companies that offer an options program to
almost all employees. (www.jpmorganchase.com/cm/cs?pagename=phase/
4.5.10 BankAmerica Corporation
In 1993 BankAmerica Corporation (BankAmerica) did not support the
Exposure Draft “Accounting for Stock-Based Compensation”. The corporation
still does not agree to expense employee stock options and applies the
provisions of APB 25 in accounting for its employee stock option plans. In
accordance with SFAS 123, the company provides disclosures as if the
company had adopted the fair value based method of measuring outstanding
employee stock options in 2001. The difference between reported net income
and after the impact of applying SFAS 123 is significant and amounted to
0,351 million USD as of December 31, 2001. Under APB 25 net income
amounted to 6,792 million USD, while if the company recorder stock-based
compensation expense using the fair value based method net income would be
6,441 million USD (www.s1.mobular.net/ccbn/7/27/29/).
For estimating the fair value of granted employee stock options on the grant
date, the company used weighted-average grant-date fair value and assumptions
to v alue t he o ptions u sing t he B lack-Scholes o ption p ricing m odel.
Compensation expense under the fair value based method is recognised over
the vesting period of the employee stock options.
BankAmerica highlighted that the Black-Scholes option pricing model was
developed to estimate the fair value of traded options, which have the different
characteristics than employee stock options and changes to the subjective
assumptions used in the model can result in materially different fair value
View Full Document
This document was uploaded on 10/31/2013.
- Fall '13