Gbs_thesis_2002_61

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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 options - 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 the 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 following ways: - The Black-Scholes method used as a valuation method for assessing the value of 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 per share. According to Intel, because of a lack...
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This document was uploaded on 10/31/2013.

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