Considering that companies have tax deductions when

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Unformatted text preview: . While studying Comment Letters and companies' opinion regarding the issue of expensing employee stock-based compensation plans, we found that majority of the companies do not favour the notion of this expense recognition in the income statement. They present a variety of reasons for this position, which we summarize as follows: • Granting employees stock options does not result into actual cash outflow for the company. As there is no actual cash outlay, this compensation does not meet the criterion of expense. • Fair value of stock-based compensation cannot be reliably measured as there are no trustworthy employee stock option pricing models. Existing option pricing models would not provide an objective result unless the underlying assumptions are modified. • If the fair value based method of accounting for employee stock option plans is be adopted, it will impair the comparability of financial results across companies. • Expensing employee stock options will reduce earnings, which might lead to the fall in share prices. However, there are a number of companies and professional organizations, which support the idea of expensing employee stock option plans. The core arguments presented in favour of expense recognition are as follows: 89 • Even though there is no actual cash outlay for companies, when they issue employee stock options, the granted stock options still represent a valuable c onsideration t o e mployees. T he b enefits o btained b y employees result in an expense regardless of whether consideration is given in cash or other goods or services. • Considering that companies have tax deductions when options are sold after satisfying the holding period, it would only be fair to show the stock-based compensation expense in the income statement. • Employee stock options might result in actual cash expense if, after employees exercise their stock options, companies repurchase their shares in the market in order to keep the constant number of outstanding shares. • Deducting the stock-based compensation expense from income would provide a more realistic picture of companies' economic position to investors. Despite the fact that the proposal to expense employee stock option plans first appeared in 1993, when the Exposure Draft preceding SFAS 123 was issued, only two companies, in our study, the Coca-Cola Company and JPMorgan Chase & Co. have actually started expensing employee stock option plans. We also came to the conclusion that many of the responding companies would adopt the fair value based method of accounting for stock-based compensation expense if the uniform standard existed around the world and if there were more reliable employee stock option pricing models developed. However, it seems that unless it becomes mandatory to expense stock-based compensation, companies will follow the practice of only providing disclosure with regard to it. FASB and IASB held a joint meeting in Norwalk, Connecticut, USA on September 18, 2002, where they signed a Memorandum of Understanding. In this Memorandum FASB and IASB agreed to adopt compatible, high-quality solutions t o e xisting a nd f uture a ccounting i ssues w orldwide (www.fei.org/download/2002pr16.pdf). Despite the Memorandum, there is little c onvergence a s y et o n t he s ubject o f t reatment o f s tock-based compensation plans. FASB still permits the intrinsic value based method of accounting for employee stock-based compensation expense, which often does not result in an income statement expense. IASB, on the other hand, proposes only a fair value based method, inevitably resulting in an income statement expense. It is a matter of importance to all stakeholders whether harmonization effect will resolve the existing differences. 90 6.2 Suggestions for Further Research While working on this thesis, the issue of expensing stock-based compensation was continuously discussed in academic journals and newspapers. The topic is vital and there are issues, which we did not cover in this thesis. First of all, IASB has not issued the standard on accounting for share-based payments yet. The period for submission of Comment Letters on ED 2 will be over on March 7, 2003. It would be of paramount interest to study the final standard and its implications for companies. Another interesting study could be done with regard to U.S companies, which changed from using the intrinsic value based method to the fair value based method. The reasons for change, transition methods selected and the results of the change could lead to some interesting and valuable conclusions. 91 92 7 List of References: Books: Alvesson, M . a nd S köldberg, K ., ( 1994). T olkning o ch r eflektion: vetenskapsfilosofi och kvalitativ metod. Lund: Studentliteratur. Eriksson, L. and Wiedersheim-Paul, F., (1997). Att utveckla, forska och rapportera. Liber-Hermods, Malmö. Holme, I.M. and Solvang, B.K., (1997). Forskningsmetodik – om kvalitativa och kvantitativa metoder. Studentlit...
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This document was uploaded on 10/31/2013.

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