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Unformatted text preview: in SFAS 123 there is limited quality guidance for
determining the volatility assumption and no consideration of adjustments in
value for companies with thinly traded stocks. Adjustments need to be allowed
for these factors to provide for a more accurate determination of fair value.
Also, employee stock options are non-transferrable and subject to forfeiture,
which reduces value. These factors are not considered in existing models,
leading to an overstatement of value. In addition, BIO believes the standard
should permit the use of new, appropriate option-pricing models as they are
Issuance, Forfeitures, and Attribution Methods
BIO sees merit to the approach in providing estimates for forfeitures at the date
of grant that eliminate large adjustments that can occur under existing U.S.
70 Standards, since such an approach could result in overstating compensation
expense for companies that are not mature and that have large unanticipated
reductions in force.
BIO believes that the existing attribution method in SFAS 123 is the most
appropriate and representationally faithful of the economics of stock-based
compensation arrangements. BIO stated that the "unit-of-service" concept in
the proposed IASB rule is overly complex, will prove difficult to track, and will
not yield estimates that are more accurate than the straight-line or graded vested
methods under SFAS123.
BIO continues to support improved disclosures that are meaningful to
shareholders and users of the financial statements. The current concern is that
the stock option disclosure could become too lengthy and complex for
shareholders and other users of financial statements. So BIO supports the
IASB's s uggestion t o p rovide a dditional d isclosure s urrounding k ey
assumptions (volatility and vesting conditions).
4.4.3 T he C ommittee o n C orporate R eporting o f F inancial E xecutives
International and the Financial Reporting Committee of the Institute of
The Committee on Corporate Reporting of Financial Executives International
and the Financial Reporting Committee of the Institute of Management
Accountants (the Committees) expressed their opinions on Invitation to
Comment “Accounting for Stock-Based Compensation: A Comparison of
FASB Statement No.123, Accounting for Stock-Based Compensation and Its
Related Interpretations, and IASB Proposed IFRS Share-Based Payment”
The Committees expressed their views on the following issues:
Issuance, Forfeitures, and Attribution Methods
The Committees agree with the FASB’s conclusion that an equity instrument is
issued only when valuable consideration has been exchanged. The existence of
vesting restrictions and the potential for forfeiture differentiate employee stock
options from virtually any other equity instrument and support the view
expressed in SFAS 123. The Committees, therefore, do not agree with the units
of service model proposed in the IASB ED. In Committees' opinion, the
underlying conceptual basis for the IASB attribution model is inconsistent: it is
not meaningful to recognize an expense for options that never vest, as the IASB
71 requires. The Committees are also concerned about the possibility that
expenses recognized under the units of service approach can actually exceed
the fair value of options granted. These outcomes stretch the credibility of the
overall model. The Committees believe that the principles underlying the IASB
model should only be adopted if they are demonstrably better than SFAS 123.
Option Pricing Models/Valuation of Employee Stock Options
The Committees state that there is universal agreement among members of both
Committees that standard option-pricing models significantly overstate the
value of employee stock options and that adjustments are necessary to reflect
the differences between traded options and employee stock options. There also
is strong agreement that the adjustments provided for in SFAS 123 do not
adequately reflect those differences. Furthermore, there has been little progress
in the development of a robust valuation model for employee stock options
following the issuance of SFAS 123 that would provide a reasonable basis for a
prescriptive approach to measurement. The Committees note that most
accounting standards provide only summary level guidance regarding fair value
measurement. Given that no robust valuation theory exists for determining the
fair value of employee stock options, the Committees believe that it would be
inappropriate to provide highly prescriptive guidance in this area. If expense
recognition is ultimately required for employee stock options in financial
statements, the requirement should stop at the principles level by indicating that
measurement should be at fair value. FASB and IASB should not mandate the
use of a particular option pricing model and companies should be permitted to
use professional judgment in deriving their best estimate of each of the relevant
variables consistent with the...
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This document was uploaded on 10/31/2013.
- Fall '13