The company believed that the most appropriate

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Unformatted text preview: of a reliable employee stock option valuation method, it would be more “appropriate to disclose a range of possible outcomes in a footnote.” The company suggests using only annual disclosure which would include the maximum value computed at the grant date of each year in a three year period. 4.1.9 JPMorgan Chase & Co. JPMorgan Chase & Co. (JPMorgan) is a leading financial services firm. Its services include Investment Banking, Consumer Banking, Private Equity and Investment Management, Treasury and Securities Services and a number of other services ( JPMorgan s tated t hat E xposure D raft “ Accounting f or S tock-Based Compensation” proposed accounting changes would not improve the quality or 52 credibility of financial statements. The company’s biggest concern was employee stock option valuation issues. According to JPMorgan, the pricing models used for trading options would not produce “a mathematically derived ‘theoretical’ value which could not be verified by a market transaction.” The company believed that the most appropriate solution would be a disclosurebased approach. Furthermore the company made comments on the following issues: Measurement Date JPM organ s upported E xposure D raft “ Accounting f or S tock-B ased Compensation” proposal to use the stock price at the grant date to measure compensation cost. Measurement Method JPMorgan agreed that the fair value is proper measurement attribute for stock awards. But the company opposed FASB’s belief that “the use of existing option-pricing m odels t ogether w ith a djustments f or f orfeitability a nd nontransferability produce estimates of the fair value of employee options that are sufficiently reliable and relevant to justify recognition in the financial statements.” The c ompany l isted s pecific f actors t hat, i n t heir o pinion, s hould b e incorporated in the option pricing model for valuing employee stock options: - non-transferability; - delayed exercisability due to vesting day; - forfeiture of options due to employee leaving the company before vesting; - different borrowing/reinvestment rates faced by individual employee stock option holders; - inability of employees to unlock the time value of options through dynamic hedging; and - the irrational early exercise of an option which tends to be a function of stock price. In JPMorgan’s view, the measurement method should be consistent for all companies (public and non-public). The company agreed that there is just an arbitrary way to reduce the value of an employee stock option to reflect its nontransferability. 53 Attribution Period The company concurred that the period from the grant date to the vesting date would be the appropriate period for recognising employee stock options compensation costs. Disclosures JPMorgan believed that disclosures were the proper way of informing financial statement users. However, the company considered that some information should remain confidential, such as the expected volatility factor and expected dividend yield. Relying totally on estimates based disclosures might lead to financial statement users’ misinterpretations. According to JPMorgan, it is very important that the benefit of providing the information to the financial statement users justify the cost of providing it. Effective Date and Transition JPMorgan stated that “A disclosure-based approach is the most appropriate course of action for stock –based compensation.” The company also agreed with the proposed three year period of pro forma disclosures before the recognition provision of the Exposure Draft “Accounting for Stock-Based Compensation” are required to be adopted. 4.1.10 BankAmerica Corporation BankAmerica Corporation (BankAmerica) is one of the world's leading financial s ervices c om panies. B ankAm erica s erves i ndividuals, s m all businesses and commercial, corporate and institutional clients across the United States and around the world ( BankAmerica did not support either the income statement recognition or the pro forma disclosure provisions of the Exposure Draft “Accounting for StockBased Compensation.” The company disagreed with “measuring employee stock options at ‘fair value’ for both practical and conceptual reasons.” BankAmerica suggested measuring all employee stock options (of public and non-public companies) at their “minimum value.” BankAmerica made comments on the following issues: Measurement Method 54 According to Exposure Draft “Accounting for Stock-Based Compensation”, the differences between traded stock options and employee stock options (the nontransferability, the forfeitability of employee stock options) could be compensated by adjusting the fair value produced by traded option pricing models. T he c ompany s tated t hat F ASB p roposal “ underestimates t he complexity of making adjustments to a traded option pricing model.” BankAmerica suggested using a minimum value method for employee stock o...
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This document was uploaded on 10/31/2013.

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