Financial accounting standards board fasb in the us

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Unformatted text preview: pread, and yet little accounting guidance exists. Financial Accounting Standards Board (FASB) in the U.S. and IASB have recently been working on this topic. To date, all have agreed that all stockbased payment transactions should be recognised in the financial statements, resulting in an expense in the income statement when the goods or services are consumed (www.iasc.org.uk). In 1993, FASB attempted to put into place an accounting standard that would require companies to treat stock options as an operating expense and incorporate them into their income statements. This proposed statement was strongly o pposed b y c ompanies ( www.fei.org/advocacy/download/ StockOptionAccounting-OnePager.pdf). After a long discussion an accounting standard, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation,” (SFAS 123) was issued by FASB in 1995. 1 IASB and FASB apply different terms to describe the same transactions with regard to stock options: IASB uses the term “share-based payment,” while FASB uses the “stock-based compensation” term. We will be generally using the term ”stock-based compensation” unless referring specifically to the IASB Discussion Paper and Exposure Draft. 9 The standard requires recognition of stock-based payment transactions with parties other than employees, based on the fair value of shares or options issued. Companies are also encouraged, but not required, to apply the same accounting method to stock-based payment to employees. If that method is not applied, the standard requires disclosures of pro forma net income and earnings per share, as if the method had been applied (www.fasb.org). However, FASB is still dealing with the issue of stock-based compensation. At the end of the year 2 002, F ASB i ssued S FAS N o. 1 48 "Accounting for Stock-Based Compensation - Transition and Disclosure," (SFAS 148) and 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,” continuing to search for the most appropriate way to account for stock-based compensation plans. IASB issued the Exposure Draft ED 2 "Share-Based Payment" on November 7, 2002. IASB has invited comments on the proposals in the ED 2 by March 7, 2003. IASB will consider the comments received on the Exposure Draft when finalizing the IFRS, which it plans to do by the end of 2003. Assuming that this is achieved, IASB proposes that the IFRS will be effective for periods beginning on or after 1 January 2004. As we can see from the discussion above, the two standard-setting bodies are working on the subject of standards governing accounting for stock option plans. However, even with introduction of standards, the issue of stock options raises a number of problems, which will be discussed in the following section. 1.2 Problem Initially, stock options appeared as an incentive for companies’ management, enabling it to enhance the companies’ performance. However, once praised for their incentive power, options are now blamed for stimulating management to commit all kinds of actions to raise companies’ share prices and keep their option packages “in the money”.2 As it is now generally agreed, management was assisted by accounting practices, which did not require the cost of stock options be treated as compensation and be deducted from company’s profits (The Economist, November 2002, Vol. 365, Issue 8298). 2 (An option is in the money, when it is more profitable for its holder to exercise the option than to make transactions directly in the underlying asset. Otherwise the option is out of the money. The option can also be at the money when the current market price of the underlying asset is equal to the striking price) (Huefner, et al., 2001). 10 The first rules governing accounting for stock options appeared in 1972, in the United States, when Accounting Principles Board (APB) issued Opinion No.25 (APB 25) “Accounting for Stock Issued to Employees.” According to APB 25, options were measured at their intrinsic value, which was determined at the grant date. But at a grant date the market price and exercise price are normally the same. Hence, the value of the stock options was then usually zero. Therefore companies recorded no expense. They only had to show stock option expense (as calculated under an option pricing model) in footnotes to their financial statements (www.orgs.comm.virginia.edu/mii/education/Fundamentals). However, the economic dispute over the issue of accounting for stock option plans is still ongoing. One of the issues raised is: Should stock options be expensed? The standard-setting bodies, namely FASB and IASB, as well as many economists, analysts and investors, came to the uniform conclusion of expensing stock options, i.e. deducting their costs from a company’s profits. In practice, however, companies tend to object to such treatmen...
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This document was uploaded on 10/31/2013.

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