An Alternative Method Of Accounting For Stock Options

Currently, the grant date fair value of employee stock options is expensed over the vesting period. Our study introduces a new valuation approach for stock options and examines the impact of this change on earning per share (EPS) for a sample of firms over the period 2002-2011. The new valuation approach provides data useful to the Financial Accounting Standards Board (FASB) as it determines whether to revise the current option accounting rules. Under the proposed approach, options are valued at their intrinsic value on the grant date (i.e., the opportunity cost or the economic promise associated with the difference between the exercise price of the option and the market price of the stock at each measurement date) and further revalued each reporting date until the options are exercised.

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A Note On Accounting For Employee Stock Options When Reporting Diluted Earnings Per Share Under The Treasury Stock Method

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v6i10.2477 ◽

2011 ◽

Vol 6 (10) ◽

Author(s):

David T. Doran

Keyword(s):

Stock Options ◽

A Priori ◽

Market Price ◽

Accounting Standards ◽

Fair Value ◽

Financial Accounting ◽

Employee Stock Options ◽

Financial Accounting Standards Board ◽

Earnings Per Share ◽

Free Environment

Firms must currently apply the fair value method in determining the amount of employee compensation incurred in the case of employee stock options.  Current GAAP also requires that for purposes of calculating diluted earnings per share (EPS), the treasury stock method be applied where the assumed proceeds from exercise of the optioned shares is used to purchase shares of the firm’s stock at its average market price of the earnings period.  These incremental shares increase the denominator for purposes of calculating diluted EPS.  These requirements are consistent across the pronouncements of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).  This study extends the work of Doran (2005) and Doran (2008).  These previous studies found that applying the treasury stock method where shares are assumed purchased at the average for the period price (instead of end of year price) understates the number of incremental shares (the denominator), which overstates diluted EPS.  However, these previous works assumed that no shares were actually purchased for the treasury during the earnings period.  The FASB indicates one reason that the average for the period price is appropriate is because if treasury shares purchases were to occur, “the shares would be purchased at various prices, not at the price at the end of the period.”  This study tests the notion that the average for the period price is appropriate under circumstances where the firm actually purchases shares for the treasury at its average market price during the earnings period.  This paper employs a simple one period model that assumes a risk free environment with complete certainty.  The model allows comparison of computed EPS with an a priori known, correct amount.  Consistent with Doran (2005) and Doran (2008), the results here again indicate that assuming purchase of treasury shares at their average market price of the earnings period understates the EPS denominator which results in EPS overstatement.  Correct diluted EPS is derived when the shares assumed purchased under the treasury stock method are acquired at the higher period ending market price.

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Employee Stock Options And Diluted Earnings Per Share

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v3i11.2828 ◽

2011 ◽

Vol 3 (11) ◽

Author(s):

David T. Doran

Keyword(s):

Stock Price ◽

Stock Options ◽

Intrinsic Value ◽

Market Price ◽

Fair Value ◽

Employee Stock Options ◽

Research Support ◽

Earnings Per Share ◽

Free Environment ◽

Period Model

At the time of this writing, SFAS No.123 (1995) prescribes GAAP in accounting for employee stock options. It allows firms to choose either the intrinsic or fair value method in determining the amount of compensation expense recognized for employee stock options. The choice of method affects the numerator of the earnings per share (EPS) calculation. The FASB recently issued a revised SFAS No. 123 (2004) which will require uniform application of the fair value method. GAAP also requires that the denominator for the diluted EPS calculation be increased for incremental shares under the treasury stock method. SFAS 128 requires the treasury stock method be applied where the proceeds from the assumed exercise of options are used to acquire shares of the firm’s outstanding stock at the average market price for the period. Previous to SFAS No. 128, APB Opinion No. 15 required that the higher of average or period ending stock price be used in determining the number of shares reacquired with the proceeds from the assumed exercise of stock options. This paper develops a simple one period model that assumes a risk free environment with complete certainty conditions in testing the accuracy of EPS calculated under GAAP using the fair value method vs. the intrinsic value method. The results indicate that EPS reported under the intrinsic value method are overstated, and further indicate that a combination of both the fair value method and the treasury stock method is needed in calculating diluted EPS. This fair value and treasury stock method combination is shown to not “double count” the stock option’s impact upon EPS. The results also indicate a slight misstatement of diluted EPS under the fair value method when applying the treasury stock method requirements of SFAS No. 128. Correct EPS results when shares are assumed reacquired for the treasury at the higher year ending price, consistent with superseded APB 15. However, the diluted EPS misstatement is so slight that the FASB’s rationale for always requiring the use of average period price seems likely to be justified. The findings of this research support the requirements of SFAS No. 123 (revised 2004) and SFAS No. 128.

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Employee Stock Options And Diluted Earnings Per Share: An Extension

International Business & Economics Research Journal (IBER) ◽

10.19030/iber.v7i2.3218 ◽

2011 ◽

Vol 7 (2) ◽

Author(s):

David T. Doran

Keyword(s):

Stock Options ◽

Market Price ◽

Accounting Standards ◽

Fair Value ◽

Employee Stock Options ◽

Employee Compensation ◽

Earnings Per Share ◽

Service Period ◽

The Impact ◽

Period Model

Firms must currently apply the fair value method in determining the amount of employee compensation incurred in the case of employee stock options. The amount of such compensation is required to be measured as fair value of the equity instrument at the grant date, with compensation expense recognized over the service period under the straight-line method. This compensation expense affects the numerator for purposes of calculating earnings per share (EPS) under generally accepted accounting principles (GAAP). Current GAAP also requires that for purposes of calculating diluted EPS, the treasury stock method be applied where the assumed proceeds from exercise of the optioned shares is used to purchase shares of the firms stock at its average market price of the earnings period. These incremental shares increase the denominator for purposes of calculating diluted EPS. These requirements are consistent across the pronouncements of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). This study extends the work of Doran (2005) where a single period model was assumed and found: 1. Application of the fair value method does not double count the impact of compensation recognized, and 2. Applying the treasury stock method where shares are assumed purchased at the average for the period price (instead of end of year price) understates the number of incremental shares (the denominator), which overstates diluted EPS. This paper employs a simple multi period model that assumes a risk free environment with complete certainty in testing the accuracy of GAAP compliant diluted EPS in the case of employee stock options. Consistent with Doran (2005) the results here again indicate that assuming purchase of treasury shares at their average market price of the earnings period understates the EPS denominator. The results of this study also indicate that the reported employee compensation expense is understated. The observed cause of this numerator error is treating the payment for the option (employee service) as if it was received in full at the grant date - as a lump sum (like inventory or some other asset), rather than being received ratably over the employee service period as an annuity. Each of these findings contributes to the observed overstatement of diluted EPS. Correct diluted EPS is observed when the employee service is treated as being received ratably over the service period, and the shares assumed purchased as treasury stock are acquired at the higher period ending market price. The amount of diluted EPS overstatement under both FASB and IASB standards is directly related to the length of the term of the option.

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The Impact of IFRS 2 "Share-Based Payment" on Malaysian Companies

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091510002025 ◽

2010 ◽

Vol 13 (03) ◽

pp. 449-468 ◽

Cited By ~ 7

Author(s):

Ruhaya Atan ◽

Nur Syuhada Jasni ◽

Yousef Shahwan

Keyword(s):

Stock Options ◽

Negative Relationship ◽

Fair Value ◽

Employee Stock Options ◽

Accounting Standard ◽

Corporate Scandals ◽

Black Scholes ◽

Compensation Plan ◽

The Impact ◽

International Accounting Standard

In the wake of corporate scandals and excessive stock options compensation, International Accounting Standard Board (IASB) has introduced a new accounting standard, IIFRS 2 Share-based Payments. The scope of the standard extends beyond payments to employees, but for the purpose of this study, the focus is only on 'employee stock options'. IIFRS 2 requires a fair value of stock options records calculated on grant date, and recognized as compensation expenses over vesting periods. Prior to the introduction of IIFRS 2, stock options were not recognized and were only disclosed in the notes to the accounts. In Malaysia, the standard is mandatory for all companies listed on or after January 1, 2006. This study assumes the requirement existed in 2003. This study examines the impact of stock options expenses from 2003 to 2005, on the top 100 Malaysian companies. The three year observations show at least 24% of the sample exceeds the 5% materiality threshold on diluted EPS. The sectors that are impacted the most are the Trade/Service and Finance sectors. From the multiple-regression test, this study finds that fair value of stock options have a negative relationship with dividend yields (input of the Black-Scholes Merton (BSM) Model). Most companies in the sample are found to pay dividends and grant stock options at the same time. Therefore, this study suggests that companies need to restructure their compensation plan thus balancing the stock options granted and dividends paid in the future.

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Congressional Intervention in the Standard-Setting Process: An Analysis of the Stock Option Accounting Reform Act of 2004

Accounting Horizons ◽

10.2308/acch.2007.21.1.1 ◽

2007 ◽

Vol 21 (1) ◽

pp. 1-22 ◽

Cited By ~ 30

Author(s):

David B. Farber ◽

Marilyn F. Johnson ◽

Kathy R. Petroni

Keyword(s):

Stock Options ◽

Political Action ◽

Fair Value ◽

Stock Option ◽

Financial Accounting Standards Board ◽

Employee Stock Option ◽

Setting Process ◽

Action Committee ◽

The Cost ◽

The Impact

We examine H.R. 3574, the Stock Option Accounting Reform Act of 2004 (the Act), which sought to prevent the Financial Accounting Standards Board (FASB) from requiring the expensing of employee stock options at fair value. We find that employee stock option expense under the Act would be approximately 2 percent of what it would be under the FASB's preferred method. We also find that House members supporting the Act were more likely to be Republican, to be conservative, and to have received larger Political Action Committee (PAC) contributions. Finally, the larger the impact of H.R. 3574 on the amount of stock option expense reported by the firm for employees who are not top-five executives, the more contributions the firm's PAC made to House members and to members of the committee that approved the Act. This result suggests that corporate opposition to the mandatory expensing of stock options at fair value is not driven solely by concerns of top-five executives about the cost of recognizing their own options.

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Accounting standards for employee stock option disclosure: The current debate

Corporate Ownership and Control ◽

10.22495/cocv4i3p8 ◽

2007 ◽

Vol 4 (3) ◽

pp. 87-95

Author(s):

Geoffrey Poitras

Keyword(s):

Accounting Standards ◽

Financial Statements ◽

Fair Value ◽

Stock Option ◽

Financial Accounting ◽

Current Debate ◽

Employee Stock Options ◽

Net Income ◽

Financial Accounting Standards Board ◽

Employee Stock Option

The paper examines the implications of recent changes to accounting standards for employee stock based compensation with contingent features. The Dec. 2005 implementation of FAS 123R by the Financial Accounting Standards Board requires the fair value of such expenses to be recorded in net income. The change is now impacting the reported financial statements of firms that have been substantial users of employee stock options. This provides an opportunity to directly assess the actual impact of FAS 123R on such firms. Arguments for and against mandatory expensing are reviewed and an assessment of the contrasting positions provided. Significant limitations of current reporting requirements are identified

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ANALISIS PERLAKUAN AKUNTANSI AGRIKULTUR PADA PETANI KELAPA PADA DESA DI DAERAH LIKUPANG SELATAN : DAMPAK RENCANA PENERAPAN ED PSAK NO.69 TENTANG AGRIKULTUR

GOING CONCERN : JURNAL RISET AKUNTANSI ◽

10.32400/gc.11.2.13058.2016 ◽

2016 ◽

Vol 11 (2) ◽

Author(s):

Claudia W.M. Korompis

Keyword(s):

Financial Management ◽

Descriptive Analysis ◽

Accounting Standards ◽

Fair Value ◽

Financial Accounting ◽

Financial Accounting Standards Board ◽

Traditional System ◽

The Face ◽

The Impact ◽

The Village

Biological assets is a unique asset, because of the transforming growth even after biological assets generate an output. Although it has many unique, but the financial management of biological assets still have to refer to the Financial Accounting Standards. Currently the Financial Accounting Standards Board (DSAK) issued SFAS No. ED 69 on agriculture which will come into force on 1 January 2017. According to this SFAS Biological assets are measured at initial recognition and at the end of each reporting period at fair value less costs to sell. Many of Regions, especially in the village do not know the accounting treatment for biological assets. This makes researchers want to analyze the impact of the application of IAS 69 ED is the continuation of agricultural farmers' efforts in this regard coconut trees in the village in the district South Likupang. With the proper financial management from the village, will support the country's economy as a whole, especially in the face of the MEA. This research uses descriptive analysis. The results of this study indicate that in general the village in the Regional South Likupang not apply to recognize the fair value of their assets. The traditional system by recognizing the asset at the acquisition price is still the basis in preparing the financial statements. But with this study are expected, farmers / entrepreneurs start applying SFAS palm plant began in 2017. Keywords: Accounting, Agriculture, ED IAS 69, Village.

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Accounting For Employee Stock Options With Service, Performance, And Market Conditions

Journal of Business Case Studies (JBCS) ◽

10.19030/jbcs.v9i1.7544 ◽

2012 ◽

Vol 9 (1) ◽

pp. 47

Author(s):

John F. Boschen ◽

Denise A. Jones ◽

Kimberly J. Smith

Keyword(s):

Stock Options ◽

Accounting Standards ◽

Service Performance ◽

Financial Accounting ◽

Creative Design ◽

Employee Stock Options ◽

Financial Accounting Standards Board ◽

Market Conditions ◽

Accounting Standard

The accounting for employee stock options has long been a subject of debate among executives, regulators, and standard-setters. The accounting standard passed by the Financial Accounting Standards Board (FASB) in 2004 allows for more creative design of these types of options. In this case, students learn about employee stock options with service, performance, and market conditions. They also learn how to value options with these conditions, and how to report them on company income statements under the new accounting guidance.

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Using Sectoral Indexes to Discount the Exercise Price of Employee Stock Options

Folia Oeconomica Stetinensia ◽

10.1515/foli-2016-0010 ◽

2016 ◽

Vol 16 (1) ◽

pp. 174-185

Author(s):

Agnieszka Majewska

Keyword(s):

Stock Price ◽

Stock Options ◽

Stock Exchange ◽

Intrinsic Value ◽

Stock Option ◽

Annual Reports ◽

Variable Component ◽

Employee Stock Options ◽

Strike Price ◽

Exercise Price

Abstract Employee stock options (ESOs) are an instrument in compensating top management of corporations. In the literature, they are described as a variable component of remuneration of a long-term character (Borkowska, 2012). There are six characteristic elements of the ESO: a grant date, the ESO plan duration, employees entitled to receive options, vesting criteria, a vesting period, and an exercise price. The article refers to the exercise price. The remuneration of employees is determined by the option’s intrinsic value, i.e. the difference between the current stock price and the exercise price. This difference affects the costs incurred by a company in relation with their incentive stock option plan. In this connection, the exercise price of stock options needs to be analysed. The literature shows that usually the strike price is equal to the stock market’s value at the time the option is granted. The options issued with an exercise price equal to the market value of the company’s stock on the date of the grant usually lead to at-the-money options. Walker (2009) mentions that almost all options issued by US firms have been such type of options. Hence, the options with exercise prices less than the prices of the underlying assets have been rarely observed. One of the solutions can be discounting the exercise price by using sectoral indexes, which are sensitive to changes on a particular market. The purpose of this paper is to address several aspects of specifying the exercise price in ESOs. The research shows how sector indexes can be used to discount it. Using sectoral indexes in determining the exercise price can partly limit the unreasonably high profits from the ESO. The literature does not provide ready-made formulas of exercise prices based on specific variables. The aim of the research is to present and apply the formula of the exercise prices in which sectoral indices are used to discount. The data are from the Warsaw Stock Exchange (WSE) and include those companies that revealed the information concerning their incentive programs in 1999–2013. The relevant data come from annual reports, current reports, supervisory boards’ resolutions, and press announcements.

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Restricted Stock versus Stock Options: The Case of Jones Apparel Group, Inc.

Issues in Accounting Education ◽

10.2308/iace.2006.21.4.449 ◽

2006 ◽

Vol 21 (4) ◽

pp. 449-459 ◽

Cited By ~ 4

Author(s):

R. Loring Carlson ◽

Thomas J. Vogel

Keyword(s):

Stock Options ◽

Chief Executive ◽

Fair Value ◽

Financial Accounting ◽

Financial Accounting Standards Board ◽

Executive Pay ◽

Corporate Scandals ◽

Compensation Package ◽

Restricted Stock ◽

Compare And Contrast

In recent years, the structure of executive/employee compensation packages has focused less on stock options and more on restricted stock. The Financial Accounting Standards Board (FASB) characterizes both of these alternatives as stockbased compensation. The reasons for the shift are numerous and include increased scrutiny of executive pay after recent corporate scandals and a renewed emphasis on the expensing of stock options using the fair value method. In this case, we focus on the issues that led Jones Apparel Group, Inc. to change its focus from stock options to restricted stock in the compensation package of its Chief Executive Officer. Jones was not subject to any scandal or corporate malfeasance, but the case demonstrates how recent events have impacted companies that use stock-based compensation. The case allows students to compare and contrast the corporate governance and accounting impacts of stock options and restricted stock.

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