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Unformatted text preview: rd and Poor’s 500 were
expensing the cost of stock options. By mid September 2002 more than ninety
companies said they would do the same. This is the clear indication how the
public opinion and politics can influence corporate behaviour (Levinsohn,
In its News Release of July 31, 2002, FASB discussed the advantages of
applying the SFAS 123 and presented its intention to undertake a limited-scope
project r elated t o t he t ransition p rovision o f S FAS 1 23
On October 4, 2002 FASB issued an Exposure Draft “Accounting for StockBased Compensation – Transition and Disclosure,” which would amend SFAS
123. T here w ere t wo m ajor p urposes f or i ssuing t his a mendment
• To enable the companies that choose to apply the fair value based
method to report the full effect of employee stock options in their
financial statements immediately upon adoption;
• To provide a better and more frequent disclosure about the cost of
employee stock options for investors and other financial statement users.
The amendment was released as SFAS No. 148 on December 31, 2002.
More detailed review of both SFAS 123 and SFAS 148 are presented in
Sections 3.9 and 3.10. 3.8 The History of Accounting for Share-Based Compensation
There is no existing International Financial Reporting Standard on share-based
payment. This gap in the International Accounting Standards area has become a
great concern as the number of companies using share-based payments is
constantly g rowing. I nternational A ccounting S tandard ( IAS) N o.19
“Employee Benefits” deals to some extent with equity compensation benefits.
However, it only covers the disclosure requirements. Therefore, in July 2000,
International Accounting Standards Committee (IASB’s predecessor) published
a Discussion Paper “Accounting for Share-based Payment” for public
comment. In July 2001, the IASB decided to further develop the Discussion
Paper in order to eventually make it an Exposure Draft. Some of the IASB
members were concerned with the possibility of being criticised for lack of due
33 process by preparers who were opposed to expensing stock options in the
income statement (The Economist, November 2002, Vol. 365, Issue 8298).
Hence, in September 2001, the IASB requested further comments on the
Discussion Paper, which were required to be submitted by December 15, 2001.
After careful consideration of the received comments and with the assistance of
the project’s Advisory Group, which consisted of individuals from different
countries, the IASB issued Exposure Draft 2 “Share-Based Payment” on
November 7, 2002 (www.iasb.co.uk). The comments on this Exposure Draft
should be submitted by March 7, 2003. A final version of the standard is likely
to be published in late 2003 and would take effect on January 1, 2004. It would
administrate all options granted since the day the formal draft is published
(www.online.wsj.com/article/0SB102686178947884200.html). 3.9 Examination of FASB Statement No. 123 “Accounting for
This Statement (issued 1995) establishes financial accounting and reporting
standards for stock-based employee compensation plans. The Statement covers
all arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer’s stock.
The Statement also applies to transactions in which a company issues its equity
instruments to acquire goods or services from non-employees. In such cases the
goods or services have to be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued (SFAS
123, par. 6).
SFAS 123 provides a choice of accounting methods for stock transactions with
employees. This Statement establishes the fair value based method of
accounting for stock-based compensation plans. It also encourages entities to
adopt this method of accounting in place of the provisions of the APB 25
“Accounting for Stock Issued to Employees.” However, the intrinsic value
based method of accounting prescribed by APB 25 still can be used for
measuring compensation costs for the plans. Entities that decide to continue
using the intrinsic value based method must make pro forma disclosures of net
income and, if presented, earnings per share, as if the fair value based 34 accounting method had been applied measuring compensation cost (SFAS 123,
A company should apply the same accounting method, either the fair value
based method or intrinsic value based method, in accounting for all of its stockbased employee compensation arrangements (SFAS 123, par. 14).
Usually, part or all of the consideration received for equity instruments issued
to employees is for past or future services. Equity instruments issued to
employees and the cost of the services received as consideration shall be
measured and recognised based on the fair value of an equity instruments
issued (SFAS 123, par.16).
Measurement is made estimating the fair value, based on the stock price at the
grant date of stock options or other equity instruments to which employees
become entitled when they have rendered the required service...
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- Fall '13