According to these auditors the fair value

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Unformatted text preview: rica Corporation (1993) Descriptions of each respondent are provided in order to describe the nature of their businesses. 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 items: 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”. Cost-benefit considerations 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, dividend yield); -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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