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for share option plans to all share options granted to employees, or
share options modified or settled, after the beginning of the fiscal year
in which this method is applied for the first time.
The company can recognise stock-based employee compensation cost
from the beginning of the fiscal year in which the fair value based
method of accounting for share options was applied for the first time
as if this method had been used to account for all employee share
options granted, modified or settled in fiscal years beginning after
December 15, 1994.
The company can restate all periods, which reflected stock-based
employee compensation cost under the fair value based accounting
method for all employee share options granted, modified or settled in
fiscal year beginning after December 15, 1994.” SFAS 148 improves the clarity of disclosures about the pro forma effects of
applying t he f air v alue b ased m ethod o f a ccounting f or s tock-based
compensation for all companies, regardless of the accounting method used. It
amends paragraph 45 of SFAS 123 and requires all companies to disclose the
method used to account for stock-based employee compensation in each
reported period. If the company adopts the fair value based method it has to
describe the method it used to report the change in accounting principles. If the
company uses the intrinsic value method, it has to present pro forma amounts
and differences, if any, in stock-based employee compensation cost, included in
net income as well as additional tax effects, if the fair value method had been
used. 37 The timing of disclosure has also been improved. SFAS 148 requires
companies to include disclosure in both, interim and annual financial
statements. 3.11 Examination of the IASB Exposure Draft 2 “Share-Based
On November 7, 2002, IASB issued an Exposure Draft 2 (ED) “Share-Based
Payment. The ED consists of three main parts (www.iasb.co.uk):
• Share-based Payment
• Share-based Payment – Basis for Conclusions
• Share-based Payment – Draft Implementation Guidance
The draft requires a company to recognize all share-based payment transactions
in its financial statements, including transactions that will be settled in cash,
other assets or equity of the company.
There are three types of transactions defined (ED 2, par.3):
• Equity-settled share-based payment transactions
• Cash-settled share-based payment transactions
• Transactions in which the company receives or purchases goods or
services and either the company or the supplier of the goods or services
has the right to choose whether the company pays the transaction in cash,
in the amounts based on the price of the company’s shares or other
equity instruments, or by issuing equity instruments.
Here we will concentrate on equity-settled share-based payment transactions,
with greatest emphasis on the issue of share options granted to employees, as
the issue of expensing the employee stock options is the most controversial.
The company has to recognize the goods or services it receives or acquires in a
share-based payment transaction when goods or services are actually obtained
or purchased. In case the obtained goods or services do not qualify for
recognition as assets they should be expensed (ED 2, par.4).
Additionally, it is written that the company has to measure the equity-settled
share-based transactions either directly, at the underlying fair value of the
goods or services obtained in such transactions, or indirectly, by reference to
the fair value of the equity instruments granted. The choice of the direct or
38 indirect method depends on which fair value is more easily determinable (ED
2, par. 7).
Subsequently, the company has two choices with regard to timing of
transaction recognition. If the fair value is measured directly, fair value should
be determined at the date the company obtains the goods or receives the
services. If the fair value is measured indirectly, it should be established at a
grant date (ED 2, par.8).
For transactions with parties other than employees it is assumed that the fair
value of goods or services received is more easily determinable as normally an
established market exists for those goods and services (ED 2, par.10).
However, as far as transactions with employees are concerned the issue of fair
value determination becomes more complicated. Normally, share options are
given to employees as part of their pay package. Therefore it is impossible to
determine directly the fair value of the services of a particular part of
employees’ pay packages. Hence, the company should measure the fair value
of employee services received by reference to the fair value of the equity
instruments granted, because the latter is more easily determinable (ED 2,
ED states that the fair value of shares granted should be measured at the market
price of the company’s shares if the company’s shares are publicly traded.
Otherwise, the company has to estimate the market price (ED 2, par.19).
The fair value of options granted should be measured at the market price of
traded options with similar terms and conditions. However, often such traded
options do not exist, because options...
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- Fall '13