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Unformatted text preview: rica Corporation (1993)
Descriptions of each respondent are provided in order to describe the nature of
4.1.1 Arthur Andersen & Co., Coopers & Lybrand, Deloitte & Touche, Ernst
& Young, KPMG Peat Marwick, Price Waterhouse
The six biggest auditing companies, Arthur Andersen & Co., Coopers &
Lybrand, Deloitte & Touche, Ernst & Young, KPMG Peat Marwick and Price
Waterhouse, expressed their opinion in one Comment Letter. All these auditing
companies agreed to oppose the Exposure Draft “Accounting for Stock-Based
Compensation.” “As the overwhelming majority of the 1700 Comment Letters
45 indicates, the proposal to record the fair value of employee stock options has
not been accepted.” According to these auditors, the fair value measurement
approach will further impair the credibility and comparability of financial
statements. Hence, the best solution is to use expanded disclosures.
4.1.2 The Boston Security Analysts Society
Since 1946, the not-for-profit Boston Security Analysts Society has been a
point of connection for one of the world's most influential investment
communities, providing an open forum for the exchange of fresh perspectives
on industry issues. Through its numerous events and educational programs,
Boston Security Analysts Society fosters professional growth, promotes
fellowship a nd e ncourages i ntegrity a mong B oston-area i nvestment
practitioners. Society events are normally held inside Boston's financial district,
which provides convenient and unique opportunities to learn from peers,
mentors and industry luminaries. The Boston Security Analysts Society has
more than 4,000 members - investment professionals and is a founding society
of the Association for Investment Management & Research that has over
50,000 members globally (www.bsas.org).
The Boston Security Analysts Society’s Comment Letter on the Exposure Draft
“Accounting for Stock-Based Compensation” was the only one of our analysed
ten Comment Letters which totally supported the Proposed Statement of
Financial Accounting Standard. The Boston Security Analysts Society agreed
that the value should be recognised in financial statements, not just disclosed in
footnotes. It also stated its concern, however, about “the possible large impact
on reported earnings and the earnings volatility of small companies as well as
substantial concern about the use of volatility measures in deriving employee
stock option values where no liquidity exists for significant periods of time”.
4.1.3 The Coca-Cola Company
The Coca-Cola Company (Coca Cola) is the world's leading manufacturer,
marketer, and distributor of non-alcoholic beverage concentrates and syrups,
used to produce nearly 300 beverage brands (www2.coca-cola.com).
Coca-Cola strongly opposed the Exposure Draft “Accounting for Stock-Based
Compensation” because “the proposed accounting rules would not enhance the
overall usefulness and reliability of our financial statements and, in fact, would
provide a result that is less meaningful to the users of financial statements than
the current rules.” Coca-Cola expressed its opinion on the three following
46 Valuation of traded stock options versus non-traded employee stock options
Coca-Cola disagreed with the recognition of compensation expense because of
a lack of a reliable and objective measurement method, since “option pricing
models were designed to value traded options,” which do not have such
characteristics as vesting restrictions or performance requirements, and a nontransfer clause.
Subjectivity of certain assumptions
To prove the importance of such assumptions as stock volatility and dividend
yield, Coca-Cola made preliminary calculations using the Black-Scholes
options pricing model for the year’s issuance of employee stock options for the
company. The calculation showed that the range of reasonably supportable
assumptions “would produce a fluctuation in value up to 33 percent” and this
would “reduce the reliability and relevance of our financial statements”.
Coca-Cola listed the following main time and effort requirements in using the
fair value measurement approach for stock-based compensation:
-determining the most appropriate variables to use (stock volatility,
-educating senior management about the specificity of the new rule;
-educating and communicating with the investors;
-creating and implementing accounting systems to accommodate the
necessary bookkeeping requirements.
The company concluded that the increased effort and time consuming fair value
measurement approach for stock-based compensations “would produce highly
subjective results that can’t be verified.”
4.1.4 The Chase Manhattan Corporation
The Chase Manhattan Corporation (Chase) is the retail financial services
franchise within JPMorgan Chase. The merger of The Chase Manhattan
Corporation and JPMorgan & Co. Incorporated was...
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- Fall '13