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Unformatted text preview: vast majority of
companies choose the intrinsic value based method. Two companies' practise
contradicts the opinions expressed in their Comment Letter. UBS Warburg
Group, for example, totally agrees in its Comment Letter that stock options
meet all expense recognition criteria and should therefore be deducted from
income. The company advises FASB to endorse the application of fair value
based method as a mandatory. It would only be natural to assume that UBS
Warburg Group uses fair value based method to value employee stock options.
Nevertheless, while looking into company's financial reports we found that it
applies the intrinsic value based method and only provides pro forma effects of
using the fair value based measurement. In 1993 the Coca-Cola Company
opposed the Exposure Draft SFAS 123. However, it was one of the first
companies who started expensing employee stock options.
Despite the efforts made by FASB in the United States to encourage companies
to adopt the fair value based method, companies do not seem to be eager to
adopt it. However, Coca-Cola, American Express, Bank Of America, Computer
Associates, Washington Post, Amazon.com and scores of other companies have
voluntarily decided to expense stock options (www.fed.org/onlinemag/sep02/
trends.htm). It is perhaps significant that most of the companies that have
publicly announced a decision to expense stock options are not among those
that have larger, more significant and broad-based stock option programs. The
decision to expense, therefore, is relatively less costly for them. Conversely, the
companies that have announced a decision to continue with current policy (not
to expense options) are those with especially large and broad based stock
Adoption of the fair value based method is even less likely to spread in Europe,
where there is no current existing standard for accounting for stock-based
compensation (Levinsohn, 2002). The most commonly used way is simply
providing disclosure of pro forma effects of applying the fair value based
method. Companies seem to deem it to be sufficient. The depth of disclosure
varies from company to company. American companies disclose pro forma
income statement and earnings per share as required by APB 25. The European
companies we reviewed tend to limit their disclosure to general information 87 about the stock option plans offered by the company, number of stock options
granted, exercised and forfeited.
The number of companies expensing or planning to expense employee stock
option costs has increased slowly. From our analysed companies just two
companies: Coca-Cola Company and JP Morgan Chase started expensing the
cost of employee stock options.
The Coca-Cola Company stated that the main reason for such decision was to
assure the most accurate financial reporting. Coca-Cola concluded that the
company’s earnings would more clearly reflect economic reality when those
costs were recorded in their financial statements.
According to the Coca-Cola Company, one of the difficulties that companies
faced in moving to the fair value based method was the difficulty of
determining the actual amount to be recorded as an expense. Under the FASB
rules, companies must determine the “fair value” of stock-based compensation.
Although six key variables are identified (stock price, exercise price, risk-free
interest rate, expected life of the option, expected stock price volatility and
expected dividends), no specific model is mandated.
The main advantages of expensing stock options are the benefit it provides to
investors—a better reflection of the company’s economic reality (increase in
investors' c onfidence i n c orporations) a nd m ore c omparability a mong
companies with stock option plans. Those benefits might help companies to
design whatever kind of options companies believe will both best motivate
employees and more align their interest with those of shareowners, without
regard for the options’ accounting effects. 88 6 Concluding Discussion
The purpose of this chapter is to summarize the evidence collected and give a
short and clear answer to our research question: What is the opinion of the
business community on the issue of expensing stock-based compensation plans
and what arguments are presented pro/con? 6.1 Conclusions
As we stated earlier in this thesis the issue of stock-based compensation
expense measurement and recognition in the income statement has been
discussed for many years by many interested parties: IASB, FASB and the
business community, i.e. companies, investors, accountants and professional
organizations. We focused our attention on the existing and proposed standards
of FASB and IASB and the Comment Letters of a number of companies and
organizations in order to see what existing FASB standards require, what IASB
intention was when issuing Exposure Draft 2 and what business enterprises'
opinion is with regard to the existing and proposed standards. In addition, we
looked into how companies deal with employee stock option expense
recognition in practice...
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- Fall '13