If the company however is performing worse than other

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Unformatted text preview: 80 5 Analysis In this chapter, we analyse the results of our study of the various Comment Letters p resented i n C hapter 4 . W e p resent t he a nalysis u nder t hese subheadings in Section 5.1 in order to better summarize the large amount of empirical evidence: SFAS 123, SFAS 148, IASB Discussion Paper, and Invitation to Comment. We also summarize important ideas and practices relevant to actual practice of companies, as obtained from their annual reports and various news releases. 5.1 General Even i f t he p ositive e ffect o n c ompanies o f e mployee s tock b ased compensation plans is not a universally shared belief, the wide use of stock options as a means of compensating employees has a number of well-grounded reasons. Stock options are said to reconcile the interests of employees with those of shareholders. They facilitate job creation, especially in information technology industries, and help corporations to cope with tight labour markets. C om panies p erceive s tock o ptions a s a m ore a dvantageous w ay o f remunerating employees since such plans do not result in actual cash outflows from the company. Via aligning the interests of employees and shareholders, who are two major stakeholder groups within a company, an improved corporate performance might be achieved. However, there seem to be as many opponents of stock options as there are proponents of them. It is believed that the broad use of stock options might significantly increase the company's shareholder value over a period of time. If the company, however, is performing worse than other companies within the industry, issuing stock options may be negatively viewed by other stakeholders. The introduction of SFAS 123 by FASB and the issuance of Exposure Draft 2 by IASB were natural flows of events. Though the use of stock option plans is constantly growing, there is no uniform standard as to how to account for them. In fact, in Europe a standard does not exist at all (Levinsohn, 2002). FASB made an attempt to propose a fair value based method of accounting when it issued its Exposure Draft in 1993. However, this proposal was defeated by strong lobbying. Companies viewed it as a threat to their good results reflected in income statements. The business community, in general, strongly disagrees with fair value based method and opposes stock option compensation expense to be deducted from income. In our opinion, their reluctance to apply fair value based method is based on their primary concern that reduced earnings will negatively influence the share price. 81 IASB addressed the issue for the first time when it published a Discussion Paper on Share-Based Payments in year 2000. Its proposal to measure sharebased compensation expense at fair value was not very well received in Europe as well. The absence of a standard requiring the use of the fair value based method of accounting for stock-based compensation leaves room for companies to omit the presentation of any expense related to stock options. Such is the case with Shell, for example, which does not provide any pro forma effects of applying fair value based method stating that the differences between the intrinsic value and fair value are insignificant. 5.2 Opinions on Stock-Based Compensation 5.2.1 SFAS 123 We have analysed ten Comment Letters on the Exposure Draft “Accounting for Stock-Based Compensation” issued by FASB in 1993. The significant majority (nine Comment Letters) opposed the Exposure Draft. And only one company in its Comment Letter totally supported the FASB Proposal. Other companies stated that proposed accounting rules would not enhance the overall usefulness and reliability of the financial statements and would provide a result that is less meaningful to the users of financial statements than the current rules. It was stated that the Exposure Draft proposed rules would result in confusion, inconsistency, and inaccuracy in corporate financial reporting and would reduce comparability of financial statements. The proposed changes would require a lot of implementation effort compared with the benefit. The main issues recurring in basically every Comment Letter we reviewed included the following: Measurement Date The majority of companies supported the Exposure Draft position that the stock price at the grant date should be used to measure compensation cost. Measurement Method The majority of companies opposed the fair value based method and disagreed with the recognition of compensation expense because of lack of a reliable and objective measurement method. Existing option pricing models are quite subjective and do not produce a reasonable or relevant value for employee stock options because of big differences between traded options and non-traded employee stock options; such differences include the nontransferability, the forfeitability of employee stock option, their long-term exercisability, the requirement of continued employment to exercise the options, future stock 82 price volatility, differences in vesting schedules, an...
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This document was uploaded on 10/31/2013.

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