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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 (www.jpmorganchase.com).
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:
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
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
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:
- delayed exercisability due to vesting day;
- forfeiture of options due to employee leaving the company before
- 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
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 (www.bankofamerica.com/investor/).
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
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This document was uploaded on 10/31/2013.
- Fall '13