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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
• 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
• Deducting the stock-based compensation expense from income would
provide a more realistic picture of companies' economic position to
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
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:
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.
- Fall '13