Conversely the companies that have announced a

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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 option programs. 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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