Ed 2 par20 the distinction is made in ed between

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Unformatted text preview: granted have terms and conditions, which differ from those of traded options. In such cases, the company should apply an option pricing model in order to estimate the fair value of the options granted. ED proposes to apply the Black-Scholes model or a binominal model. When using an option pricing model, the factors which should be taken into consideration are the exercise price of the option, the life of the option, the current price of the underlying asset, the expected volatility of the share price, the dividends expected on the shares, and the risk-free interest rate for the life of the option. (ED 2, par.20). The distinction is made in ED between contracted life of the option and its expected life. Expected life is defined as the period of time from grant date to the date on which an option is expected to be exercised. For non-transferable options, the option’s expected life rather than its contracted life should be used. 39 It is especially important in the case with share options granted to employees as they are non-transferable (ED 2, par.21). When the company measures the fair value of options or shares granted expected dividends should be taken into consideration (ED 2, par.23). If there are any specific vesting conditions to be satisfied, they should also be considered when estimating the fair value of options or shares. For example, when options or shares are granted to employees, they are usually tied to employees’ remaining employment in the company for a specified length of time (ED 2, par.24). ED requires companies to provide comprehensive disclosure regarding the shares or options granted. Companies are obliged to present such data as a description of each type of share-based payment arrangement and the number and weighted average exercise prices of options. Companies should also disclose the information which would enable the users of financial statements to understand how fair value of shares or options granted was estimated. In addition, disclosure of the effect of expenses, which arise due to the sharebased payment transactions, on the companies’ profit and loss statements is required (ED 2, par.45-53). 3.12 I nvitation t o C omment “ Accounting f or S tock-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” This Invitation to Comment was issued by FASB in November, 2002 to request comments on certain issues that FASB will discuss in order to improve U.S. financial accounting and reporting standard and to promote international convergence of high-quality accounting standards. These comments were requested by February 1, 2003. The Invitation to Comment requests opinions on the differences between SFAS No. 123, “Accounting for Stock-Based Compensation”, a nd i ts r elated i nterpretations, a nd I ASB P roposed International Financial Reporting Standard, “Share–Based Payment”(ED 2). Furthermore, the Invitation to Comment uses those differences to request views on other aspects of accounting for stock-based compensation at fair value. It is stated in the Invitation to Comment that both standards are based on different principles. The ED 2 and SFAS 123’s main purpose is to account for stock-based compensation by measuring and recognising the fair value of goods and services received in exchange for equity instruments. In the area of 40 transactions with employees, SFAS 123 uses a modified grant-date fair measurement method: the reason for using grant date is that fair value of the ward is initially determined at its grant date, and the reason for using vesting date is that compensation cost related to the award is adjusted for subsequent events such as actual forfeitures and actual outcomes of performance conditions. In the area of transactions with employees, ED 2 uses a form of the grant-date fair value measurement method as a practical expedient. Vesting-date measurement method is not used. Looking at the effect of forfeitures, ED 2 suggests discounting the fair value of an equity instrument determined at grant date for the effect of possible forfeitures d ue t o f ailure t o s atisfy t he v esting c onditions. A ggregate compensation expense should be measured at the number of units of service received during the vesting period multiplied by the discounted fair value per unit of service determined at the grant date. Amounts recognized for employee services are not subsequently reversed, even if the equity awards granted are forfeited. According to SFAS123, the fair value of an equity instrument determined at grant date should not be adjusted for the effect of possible forfeitures d ue t o f ailure t o s atisfy t he v esting c onditions. A ggregate compensation expense should be measured at the number of vested equity instruments multiplied by the fair value of those equity instruments at the grant date. Amounts recognized for employee services during the vesting period are subsequently reversed if the equity awards granted are forfeited. In the Invitation to Comment simil...
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This document was uploaded on 10/31/2013.

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