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Unformatted text preview: to take a charge against earnings
for employee stock-based compensations. The company stated three main
reasons for this opinion:
- The proposal would negatively impact Oracle’s ability to offer stock
- It would weaken the ability of high technology companies to remain
competitive in the world economy.
- It would lead to less accurate financial reporting.
Oracle was also concerned about the Black-Scholes model, which according to
company, would “cause confusion, inconsistency, and inaccuracy in corporate
financial reporting.” The measurement problem exists because there is no
method that could precisely estimate:
- the nontransferability of employee stock options;
- their long-term exercisability;
- the requirement of continued employment to exercise the options;
- future stock price volatility;
- differences in vesting schedules; and
- changes in market price which are unrelated to company performance.
Oracle's recommendation to FASB was to inform shareholders in footnotes to
the companies’ financial statements together with theoretical valuation under
the Black-Scholes model, and during several years period to make the decision
whether t his F ASB E xposure D raft “ Accounting f or S tock-Based
Compensation” should be implemented.
50 4.1.7 LTV Steel Corporation
The LTV Steel Corporation (LTV Steel) is a manufacturer with interests in
steel and steel-related businesses. LTV Steel, along with 48 subsidiaries, filed
voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code on
December 29, 2000 (www.ltvsteel.com).
LTV Steel strongly opposed the Exposure Draft “Accounting for Stock-Based
Compensation.” The company expressed its preference for a disclosure-based
approach. LTV Steel disagreed with recognition of employee stock-based
compensation costs in financial statements because “the recognition of noncash charges of employee stock award transactions, that do not affect cash
flows or net equity, does not appear to be important in assessing the financial
performance or condition of an enterprise.” Furthermore, LTV Steel expressed
its opinion on the following topics:
Valuation of Employee Stock Options
According to LTV Steel, “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. LTV Steel concluded that it might be impossible to develop a
consistent option pricing for employee stock options because “they do not trade
and, because the assumptions used in the models are extremely subjective and
produce an amount that is never verified in an actual transaction.”
Use of Expected Term to Determine Expense and Value Options
LTV Steel disagreed with the Exposure Draft “Accounting for Stock-Based
Compensation” proposal to use the expected term of the option on the grant
date and then adjust the value using the actual term because it leads to
“unnecessary complexity and inappropriate results.”
The company listed two acceptable alternatives to make financial statement
users aware of employee stock options:
- earnings per share calculations to reflect the effect on earnings per
share of including options;
- usage of expanded disclosures.
4.1.8 Intel Corporation 51 Intel Corporation (Intel) supplies the computing and communications industries
with chips, boards, systems and software building blocks that are the
"ingredients" of computers, servers, and networking and communications
products. These products rely on Intel's technology leadership and expertise in
silicon design and manufacturing to help customers create advanced computing
and communications systems (www.intel.com/intel/annual01/ about.htm).
Intel described the FASB proposal as representing both “improper accounting
and impediment to entrepreneurism and innovation in U.S. high technology
industries.” Intel strongly opposed Exposure Draft “Accounting for StockBased Compensation” proposal to require taking an earnings charge for
employee stock options because this proposal “could potentially undermine the
credibility and comparability of corporate financial statements” in the
- The Black-Scholes method used as a valuation method for assessing the
employee stock options would decrease financial statement
accuracy s ince “ this m odel w ill n ot a dequately a ddress t he n ontransferability of employee options, their long-term exercisability, or the
requirement of continued employment to exercise the options.”
- The proposed charge represents a non-cash expense, which will never be
converted to cash, and might never have the value attributed to it. The
Exposure Draft “Accounting for Stock-Based Compensation” does not offer
a solution to reverse the charge if the value never materializes.
- The proposed changes would require a lot of implementation effort
compared with the benefit.
- It would repeat an economic dilution effect already reflected in earnings
According to Intel, because of a lack...
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This document was uploaded on 10/31/2013.
- Fall '13