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Unformatted text preview: stitute (Institute) is the national association of the
American i nvestment c ompany i ndustry. I t w as f ounded i n 1 940, i ts
membership includes 8,935 mutual funds, 559 closed-end funds, and six
sponsors of unit investment trusts. Its mutual fund members represent more
than 90 million individual shareholders and manage approximately $6.4
trillion. The Investment Company Institute represents its members and their
shareholders in matters of legislation, regulation, taxation, public information,
economic and policy research, business operations, and statistics. The Institute
seeks to enhance public understanding of the investment company business, to
serve the public interest by encouraging adherence to the highest ethical
standards by all segments of the industry, and to promote the interests of fund
shareholders (www.ici.org/about_ici.html). 68 The Institute recommends FASB to move forward with a reconsideration of
SFAS 123. The Institute expressed its belief that accounting standards should:
(1) require issuers to treat the fair value of stock options granted to
employees to be recognized as expense in the income statement; and
(2) ensure uniformity in how stock options are valued for this purpose.
The Institute stated that mandatory expense treatment is necessary to ensure
full and fair disclosure of issuers’ results of operations and financial position.
The Institute supports the IASB proposal to require issuers following
International Accounting Standards to expense the fair value of stock options
granted to employees.
The Institute made comments on the following issues:
Issuance, Forfeitures, and Attribution Methods
On the Invitation to Comment question whether the effect of forfeitures should
be incorporated into the estimate of the fair value of options granted, the
Institute believes that SFAS 123’s approach, which excludes forfeitures from
the estimate of the fair value of options granted, is the preferable approach.
Requiring issuers to estimate future forfeitures and to incorporate that estimate
into the option pricing model would enable them to “manage” the fair value of
options granted and related compensation expense by adjusting their estimates.
In addition, the IASB approach would not seem to allow issuers to adjust
compensation e xpense f or a ny v ariance b etween e stimated a nd a ctual
forfeitures. For these reasons, the Institute believes excluding the effects of
forfeitures from the estimate of the fair value of options granted combined with
adjustment of compensation expense based on actual forfeitures yields the most
accurate results. The Institute expressed its opinion that analysts and investors
are familiar with the Statement 123 approach and that adoption of the IASB
approach may complicate their ability to estimate compensation expense and
future earnings (www.ici.org/02_fasb_stock_option.html).
4.4.2 The Biotechnology Industry Organization
The B iotechnology I ndustry O rganization ( BIO) i s t he n ational t rade
organization representing the biotechnology industry, and represents more than
1,100 biotechnology companies, academic institutions, state biotechnology
centres and related organizations in all 50 U.S. states. The biotechnology
industry, like many other growth sectors of the economy, uses employee stock
option plans that are very important to the continued growth of the industry.
69 Such plans are especially important as the industry continues to commere
its products and needs to attract employees from other, more mature industries
BIO’s primary concern with the Invitation to Comment is the use of the BlackScholes Value for employee stock options. The biotechnology industry (and
BIO's membership) is dominated by emerging growth companies that have
highly volatile stocks, many with limited liquidity. In light of this, BIO does
not support expense reporting of stock options in the income statement.
Specifically, the Black-Scholes model was not designed and is inappropriate
for valuing employee stock options. For volatile stocks, the model produces
values that it believes are misleading to investors and other users of financial
statements. Additionally, the Black-Scholes model does not take into account
that employee stock options are not freely traded and cannot be exercised in
many situations because of blackout periods. BIO continues to believe that
current reporting choices provided by SFAS 123 are working and should
continue. They say they would be happy to provide several examples of how
the Black-Scholes Value, when applied to companies in their industry, can be
very misleading to investors.
BIO expressed its opinion on the following issues:
Option Pricing Models / Valuation of Employee Stock Options
The accounting standard should require the use of an appropriate option-pricing
model for footnote disclosure. The model used, including key assumptions and
the basis for selecting a particular model, should be clearly disclosed in the
footnotes. The Black-Scholes model often can produce misleading results for
companies with stocks that are highly volatile and/or have limited liquidity.
Under current guidance...
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This document was uploaded on 10/31/2013.
- Fall '13