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Unformatted text preview: t of stock options.
They claim that stock options are not really an expense since they are not
transferring actual cash. FASB argument is that stock option plans are a form
of compensation, as there is value being transferred, even if it is not cash
(www.nytimes.com/reuters/business/business-column-nettr). D espite F ASB’s
view that expensing stock options would improve the financial reporting, it did
not drastically change the rules when it issued SFAS 123. While under SFAS
123 it is preferable to expense stock options, using a fair-value based method,
companies have a choice of not doing so (Dakdduk, 1996).
Another issue raised with regard to stock options is: How are options valued
and when are they expensed? Economists mostly agree that stock options
should be expensed using a fair-value method, which reflects what the options
would cost to buy in the market if they were available. Two other methods,
such as the intrinsic value and the minimum value method, are ruled out by
both economists and IASB. FASB is also inclined to applying a fair-value
method (The Economist, November 2002, Vol. 365, Issue 8298). However,
FASB provides companies with the option of how to measure stock option
plans. FASB believes that having multiple choices will actually encourage
companies to expense them (www.online.wsj.com/article_print). The issue of
when to expense options raised additional disagreements. IASB wants the
expense to be recognised at a date when an option is awarded to employees, i.e.
grant date. But some economists believe options should be expensed when they
are exercised, i.e. when the options holder trades it for the underlying shares.
Under this approach, options would still be expensed at a grant date, but
subsequently the estimated value would be adjusted to take into account the
changes in value. Upon exercise of the option, the company would have to take
11 any gain or loss in order to match the option’s actual value when exercised. It
would diminish the incentive to manipulate option values since any difference
from the option’s final true value results in additional charges to a company
(The Economist, November 2002, Vol. 365, Issue 8298).
The above discussion can be summarised into three major questions:
• Should companies expense stock options?
• How should stock options be valued?
• Is granting an option a once-only expense for companies or is it a
contingent liability, the potential cost of which changes with fluctuations
in market price of companies’ shares and the final cost of which becomes
clear when options are exercised or expire?
The standard-setting bodies, IASB and FASB in this thesis, and the companies
have different answers with regard to these questions. We will look deeper into
what issues bring up the most controversy and what are the commonly
provided answers when it comes to implementing the accounting for stock
options in practice. 1.3 Research Issue
The question we are going to answer in our thesis is:
• What is the opinion of the business community on the issue of
expensing stock-based compensation plans and what arguments are
presented pro/con? 1.4 Purpose
The purpose of this thesis consists of four parts:
• Describe existing and proposed rules, namely:
“Accounting for Stock-Based Compensation,” Statement
of Financial Accounting Standard No. 123;
“Accounting for Stock-Based Compensation – Transition
and Disclosure,” Statement of Financial Accounting
Standard No. 148;
“Share-Based Payment,” Exposure Draft International
Financial Reporting Standard; 12 Invitation to Comment “Accounting for Stock-Based
Compensation: A C omparison o f F ASB S tatement
No.123, Accounting for Stock-Based Compensation and
Its Related Interpretations, and IASB Proposed IFRS
• Make comparisons of existing and proposed rules for accounting
for stock options to how companies account for stock options in
• Make an analysis of a selected range of Comment Letters
submitted by various companies in order to identify the main
issues discussed by these companies and their views regarding the
treatment of stock option plans in financial statements.
• Present conclusions on the basis of the analysis.
- 1.5 Delimitations
Mainly due to the lack of time, some limitations of scope are set for this thesis.
The main existing and proposed rules regarding accounting for stock options
have been selected. However, one of the proposed rules is an Exposure Draft
and one is an Invitation to Comment. The periods over which Comment Letters
can be submitted on this Exposure Draft and Invitation to Comment are not
over yet. Therefore the final version of the standards might differ from the
proposed ones. However, we do not have enough time to wait until these
proposed rules become standards and will have to draw some of our
conclusions on the basis of the Exposure Draft.
As it was not feasible to study all submitted Comment Letters, we selected a
number of Comment Letters submitted by companies with regard to the
existing and proposed FASB...
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- Fall '13