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

John F. Boschen; Denise A. Jones; Kimberly J. Smith

doi:10.19030/jbcs.v9i1.7544

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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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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THE EVOLUTION OF THE RELATIONSHIP BETWEEN THE US FINANCIAL ACCOUNTING STANDARDS BOARD AND THE INTERNATIONAL ACCOUNTING STANDARD SETTERS: 1973–2008

Accounting Historians Journal ◽

10.2308/0148-4184.39.1.1 ◽

2012 ◽

Vol 39 (1) ◽

pp. 1-51 ◽

Cited By ~ 12

Author(s):

Robert J. Kirsch

Keyword(s):

Accounting Standards ◽

Financial Accounting ◽

Working Relationships ◽

International Accounting ◽

International Accounting Standards ◽

Financial Accounting Standards Board ◽

Accounting Standard ◽

Staff Members ◽

The Us ◽

The Relationship

ABSTRACT Utilizing archival materials as well as personal interviews and correspondence with personnel of the Financial Accounting Standards Board (FASB) and International Accounting Standards Committee/Board (IASC/B), including former Board chairmen and staff members, this paper examines the development of the working relationships between the FASB and the IASC/B from their earliest interactions in 1973 through the transformation of the IASC into the IASB and the Convergence Program rooted in the 2002 Norwalk Agreement up to 2008.

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Impairment reversals: unbiased reporting or earnings management

International Journal of Accounting and Information Management ◽

10.1108/ijaim-08-2016-0084 ◽

2018 ◽

Vol 26 (2) ◽

pp. 245-271 ◽

Cited By ~ 3

Author(s):

Tongyu Cao ◽

Hasnah Shaari ◽

Ray Donnelly

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Accounting Standards ◽

Financial Accounting ◽

Financial Accounting Standards Board ◽

Reporting Standard ◽

Accounting Standard ◽

Content Type ◽

Study Support ◽

A Company

Purpose This paper aims to provide evidence that will inform the convergence debate regarding accounting standards. The authors assess the ability of impairment reversals allowed under International Accounting Standard 36 but disallowed by the Financial Accounting Standards Board to provide useful information about a company. Design/methodology/approach The authors use a sample of 182 Malaysian firms that reversed impairment charges and a matched sample of firms which chose not to reverse their impairments. Further analysis examines if reversing an impairment charge is associated with motivations for and evidence of earnings management. Findings The authors find no evidence that the reversal of an impairment charge marks a company out as managing contemporaneous earnings. However, they document evidence that firms with high levels of abnormal accruals and weak corporate governance avoid earnings decline by reversing previously recognized impairments. In addition, companies that have engaged in big baths as evidenced by high accumulated impairment balances and prior changes in top management, use impairment reversals to avoid earnings declines. Research limitations/implications The results of this study support both the informative and opportunistic hypotheses of impairment reversal reporting using Financial Reporting Standard 136. Practical implications The results also demonstrate how companies that use impairment reversals opportunistically can be identified. Originality/value The results support IASB’s approach to the reversal of impairments. They also provide novel evidence as to how companies exploit a cookie-jar reserve created by a prior big bath opportunistically.

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The Accounting Standard-Setting Due Process, Corporate Consensus, and FASB Responsiveness: Employers' Accounting for Pensions

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x9501000308 ◽

1995 ◽

Vol 10 (3) ◽

pp. 555-564 ◽

Cited By ~ 22

Author(s):

Georgia R. Saemann

Keyword(s):

Conceptual Framework ◽

Due Process ◽

Accounting Standards ◽

Standard Setting ◽

Financial Accounting ◽

Financial Accounting Standards Board ◽

Accounting Standard ◽

Accounting Standard Setting

The Financial Accounting Standards Board (FASB) uses a due process to ascertain the views of its constituents and to build consensus while setting standards based on a sound conceptual framework. This study examines the responsiveness of the FASB and its success in building consensus among corporations in the due process on Employers' Accounting for Pensions. The findings indicate that the FASB is influenced by the number of opposing comments filed by its corporate constituents. Further, there is evidence that consensus was built throughout the due process for the highly controversial standard.

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Valuing the Reload Features of Executive Stock Options

Accounting Horizons ◽

10.2308/acch.1999.13.3.219 ◽

1999 ◽

Vol 13 (3) ◽

pp. 219-240 ◽

Cited By ~ 16

Author(s):

P. Jane Saly ◽

Ravi Jagannathan ◽

Steven J. Huddart

Keyword(s):

Option Pricing ◽

Stock Options ◽

Accounting Standards ◽

Financial Accounting ◽

Executive Stock Options ◽

Pricing Model ◽

Financial Accounting Standards Board ◽

Option Pricing Model

For options with a reload feature, the holder is automatically entitled to new options when the initial option is exercised. Under Statement of Financial Accounting Standards No. 123, the grant date value of executive stock options excludes the value of a reload feature because the Financial Accounting Standards Board believes it is not feasible to value a reload feature at the grant date. We show how the Binomial Option Pricing Model can be used to value options and the reload feature at the grant date. Ignoring the reload can substantially understate the value of the option. Accordingly, the Financial Accounting Standards Board may wish to reconsider the accounting for reload features.

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Accounting for Stock Options

The Journal of Economic Perspectives ◽

10.1257/089533005775196714 ◽

2005 ◽

Vol 19 (4) ◽

pp. 115-134 ◽

Cited By ~ 16

Author(s):

Jeremy Bulow ◽

John B Shoven

Keyword(s):

Stock Options ◽

Accounting Standards ◽

Financial Statements ◽

Financial Accounting ◽

Financial Statement ◽

Financial Accounting Standards Board ◽

Public Companies ◽

Valuation Method ◽

History Of ◽

Reported Earnings

As public companies begin their new fiscal years, they are implementing a new and controversial Financial Accounting Standards Board (FASB, 2004) proposal for expensing stock options. Applied to 2003 and 2004, this rule would have slashed reported earnings of the Standard & Poor's 500 by 8.6 and 7.4 percent; the effect in the bubble years would have been more than twice as large. We describe the history of how these options have been expensed for financial statement purposes. We assess the new FASB approach and find that it is deeply flawed. The main purpose of the paper is to describe an alternative options expense valuation method, the Bulow-Shoven approach, that addresses these problems. Our approach is simpler than the new FASB methodology, less prone to earnings manipulation and more consistent with the way the rest of compensation is treated in financial statements.

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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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FASB's Not-for-Profit Financial Reporting Project: Analysis of Letters to ASU 2016-14 Exposure Draft

Journal of Governmental & Nonprofit Accounting ◽

10.2308/jogna-19-006 ◽

2020 ◽

Vol 9 (1) ◽

pp. 45-75

Author(s):

Donald R. Deis ◽

Arpita Shroff

Keyword(s):

Financial Reporting ◽

Phase 1 ◽

Accounting Standards ◽

Data Availability ◽

Financial Accounting ◽

Financial Accounting Standards Board ◽

Accounting Standard ◽

The Public ◽

For Profit ◽

Not For Profit

ABSTRACT In 2015, the Financial Accounting Standards Board (FASB) issued an Exposure Draft (ED) as part of its first significant project in over 20 years on financial reporting by Not-for-Profit organizations (NFP). In this study, we categorize the 264 letters received on the ED by the type of respondent and analyze the responses using ANOVA, multiple comparisons tests, and multidimensional scaling. Ultimately, as Phase 1 of its NFP project, FASB issued accounting standards update (ASU) 2016-14 containing proposed changes supported by a majority of the respondents to the ED. The Board deferred recommended changes with less support from respondents to Phase 2 of the project. Although constituents often accuse accounting standard setters of standards-overload and for being unresponsive to their comments (Herz 2003), our findings indicate otherwise. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G00; L31; M40.

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Tratamiento contable de las stock options según la normativa contable internacional

Contaduría y Administración ◽

10.22201/fca.24488410e.2010.259 ◽

2010 ◽

Author(s):

ELENA MERINO MADRID ◽

REGINO BANEGAS OCHOVO ◽

JESÚS FERNANDO SANTOS PEÑALVER

Keyword(s):

Financial Reporting ◽

Stock Options ◽

Accounting Standards ◽

Financial Accounting ◽

International Accounting ◽

International Accounting Standards ◽

Financial Accounting Standards Board ◽

Reporting Standard ◽

International Financial Reporting Standard ◽

Ifrs 2

LA RETRIBUCIÓN QUE HACEN LAS EMPRESAS A SUS DIRECTIVOS Y EMPLEADOS MEDIANTE LA ENTREGA DE OPCIONES SOBRE ACCIONES (STOCK OPTIONS) SE HA CONVERTIDO EN UNA PRÁCTICA HABITUAL EN MUCHOS PAÍSES DEL MUNDO. HASTA FECHAS RECIENTES NO EXISTÍA UN CONSENSO SOBRE EL TRATAMIENTO CONTABLE QUE SE DEBÍA DAR A ESTE TIPO DE TRANSACCIONES; SIN EMBARGO, EN LA ACTUALIDAD PARECE QUE TAL CONSENSO SE HA ALCANZADO AL EXIGIR TANTO EL INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) COMO EL FINANCIAL ACCOUNTING STANDARDS BOARD (FASB), EN LA INTERNATIONAL FINANCIAL REPORTING STANDARD, IFRS 2 (NIIF 2, NORMA INTERNACIONAL DE INFORMACIÓN FINANCIERA) Y STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) 123 (R) RESPECTIVAMENTE, QUE SE RECONOZCA LA REMUNERACIÓN BASADA EN LA ENTREGA DE OPCIONES SOBRE ACCIONES COMO UN GASTO EN LOS ESTADOS FINANCIEROS. EL OBJETIVO DE ESTE TRABAJO ES ANALIZAR EL TRATAMIENTO CONTABLE APLICABLE DE ACUERDO CON LA NORMATIVA CONTABLE INTERNACIONAL O DE INFORMACIÓN FINANCIERA (NIC/NIIF).

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An Alternative Method Of Accounting For Stock Options

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v30i2.8415 ◽

2014 ◽

Vol 30 (2) ◽

pp. 439

Author(s):

Thomas Smith ◽

Adrian Valencia ◽

Ara Volkan

Keyword(s):

Stock Options ◽

Intrinsic Value ◽

Market Price ◽

Fair Value ◽

Financial Accounting ◽

Employee Stock Options ◽

Financial Accounting Standards Board ◽

Exercise Price ◽

The Difference ◽

The Impact

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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