gbs_thesis_2002_61 - Accounting and Finance Master Thesis...

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Accounting and Finance Master Thesis No 2002: 61 ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS THEORY AND PRACTISE IN THE BUSINESS COMMUNITY Olga Bagaviciute and Daiva Mazeikaite
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Graduate Business School School of Economics and Commercial Law Göteborg University ISSN 1403-851X Printed by Elanders Novum
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3 Abstract Stock-based compensation plans are now a common feature of employee remuneration, not just for directors and senior executives, but for many other employees as well. However, regardless of the increasing use of stock-based payment, there is no existing International Financial Reporting Standard (IFRS) on how to account for these transactions. Concerns have been raised about this lack of an international standard. Financial Accounting Standards Board (FASB) in the United States and International Accounting Standards Board (IASB) have recently been working on this topic. To date, all have agreed that all stock-based payment transactions should be recognised in the financial statements, resulting in an expense in the income statement. Already, in 1993, the FASB attempted to put into place an accounting standard that would require companies to treat stock options as an operating expense and incorporate them into their income statements. This proposed statement was strongly opposed by companies. There are several questions which can be asked about stock-based compensation, namely: Should companies expense stock options? How should stock options be valued? Is granting an option a once-only expense for companies or is it a contingent liability, the potential cost of which changes with fluctuations in market price of companies’ shares and the final cost of which becomes clear when options are exercised or expire? The standard-setting bodies, IASB and FASB in this thesis, and the companies have different answers with regard to these questions. We will examine what issues bring up the most controversy and what are the more accepted answers when it comes to implementing the accounting for stock options in practice. We review the stock option pricing models available to date and distinguish their drawbacks when they are applied to value employee stock option plans. We selected thirty two Comment Letters from the vast number of those submitted by various companies with regard to proposed standards and we looked into accounting practices of these companies in order to see which alternatives of accounting for stock-based compensation expense these companies have chosen.
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4 Key-words: share-based compensation expense, stock-based compensation expense, stock option plan, IASB, FASB, option pricing model, intrinsic value, fair value, Comment Letters.
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5 Table of Contents: 1 Introduction .............................................................................................. 9 1.1 Background ........................................................................................... 9 1.2 Problem .............................................................................................. 10 1.3 Research Issue .................................................................................... 12 1.4 Purpose ............................................................................................... 12 1.5 Delimitations ...................................................................................... 13 1.6 Thesis Outline ..................................................................................... 14 2 Methodology .......................................................................................... 15 2.1 Research Approach ............................................................................. 15 2.2 Research Perspective ........................................................................... 16 2.3 Research Design ................................................................................. 16 2.4 Research Method ................................................................................ 17 2.5 Data Collection ................................................................................... 17 2.6 Quality of the Research ....................................................................... 19 3 Theory .................................................................................................... 21 3.1 The Concept of Stock-Based Compensation ........................................ 21 3.2
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