The institute supports the iasb proposal to require

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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 (www.bio.org/tax/letters/20030131.asp). 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.

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