To the question of whether the effect of forfeitures

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Unformatted text preview: existing option pricing models. They find them to be inappropriate for valuation of employee stock options. It is often underlined that assumptions used in the Black-Scholes and binominal option pricing models have to be modified when applying them to employee stock options. The modifications made would be company-specific and rather subjective. Hence, the ultimate results would be incomparable across companies. Providing disclosure about the assumptions made when using option pricing models would give deeper insight into how companies calculated stock option expense. But even extensive disclosure does not eliminate the necessity of introducing updated and more comprehensible and employee stock options specific models to measure stock-based compensation expense. As for the date of measuring the stock-based compensation expense, all responding companies agreed that grant date is the most appropriate as this is the date when all parties involved agree on the transaction and its value. 5.2.4 Invitation to Comment The main issues recurring in basically every Comment Letter we reviewed included the following: Issuance, Forfeitures, and Attribution Methods Some companies disagreed with the units of service model proposed in the IASB ED because of inconsistency of a conceptual basis for the IASB attribution model. The concern was also expressed about the possibility that expenses recognized under the units of service approach can actually exceed the fair value of options granted. These outcomes stretch the credibility of the overall model. To the question of whether the effect of forfeitures should be incorporated into the estimate of the fair value of options granted, companies believed that Statement 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. Furthermore, the IASB approach would not allow issuers to adjust compensation expense for 85 any variance between estimated and actual forfeitures. In addition, the proposed IFRS is overly complex, will prove difficult to track, and will not yield estimates that are more accurate than the straight-line or graded vested methods under Statement 123. 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. According to SFAS 123, there is limited quality guidance for determining the volatility assumption and no consideration of adjustments in value for companies with thinly traded stocks. Adjustments need to be allowed for these factors to provide for a more accurate determination of fair value. Employee stock options are non-transferrable and subject to forfeiture, which reduces value. These factors are not considered in existing models, leading to an overstatement of value. Companies underlined that FASB and IASB should not mandate the use of a particular option pricing model and companies should be permitted to use professional judgment in deriving their best estimate of each of the relevant variables consistent with the fair value objective. Companies suggested that in order to estimate fair value, companies should have the ability to use the probability distribution of an option's lifetime, as estimated from historical data, rather than its expected value only; employ a stochastic model for volatility, calibrated to historical data; apply models other than standard geometric Brownian motion to describe the uncertainty in the temporal evolution of share prices into the future, provided empirical evidence can be produced that supports them. If such adjustments were permitted, the companies also would agree that it would be appropriate to provide disclosures that help investors understand the model that was used and the methodologies applied for determining the assumptions. Disclosure Companies expressed their views that improved disclosures are meaningful to shareholders and users of the financial statements. The current concern is that the stock option disclosure could become too lengthy and complex for 86 shareholders and other users of financial statements. Some companies supported the IASB's suggestion to provide additional disclosure surrounding key assumptions (volatility and vesting conditions). 5.2.5 Practice of Accounting for Stock-Based Compensation Expense When looking at the annual reports of companies and the methods used to measure stock-based compensation expense, we found that the...
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This document was uploaded on 10/31/2013.

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