scholarly journals A Critical Review of the Fair Value Settlement Procedure for Stock Options

2015 ◽  
Vol 4 (1and2) ◽  
pp. 20
Author(s):  
Oege Pennin ◽  
Martijn J. Van den Assem ◽  
Remco C.J. Zwinkels
Keyword(s):  
Critical Review ◽  
Stock Options ◽  
Intrinsic Value ◽  
Fair Value

We review the European practice of fair value settlement of stock options after a successful takeover bid. We argue on both fundamental and practical grounds that the inherent complexity, arbitrariness and inaccuracy of fair value calculations call for replacement by intrinsic value settlement. This alternative is simple, transparent, well-defined, and common practice at other exchanges

scholarly journals Employee Stock Options And Diluted Earnings Per Share

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.

scholarly journals An Alternative Method Of Accounting For Stock Options

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

<p>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.</p>

Keeping Up Appearances: The Fair Value Settlement of Stock Options

2013 ◽  
Author(s):  
Oege Pennin ◽  
Martijn J. Van den Assem ◽  
Remco C. J. Zwinkels
Keyword(s):  
Stock Options ◽  
Fair Value

Jealousy

2018 ◽  
Author(s):  
Kristján Kristjánsson
Keyword(s):  
Critical Review ◽  
Intrinsic Value ◽  
Style Analysis ◽  
Specific Emotion ◽  
Moral Arguments ◽  
Broad Dimension

Chapter 6 proceeds via a critical review of recent writings about jealousy in philosophy and psychology. Although Aristotle himself did not explore this emotion, it is easily amenable to an Aristotle-style analysis. It turns out, however, that although Aristotelian conceptual and moral arguments about the necessary conceptual features of jealousy qua specific emotion, and the intrinsic value or disvalue of a stable trait of jealousy for eudaimonia, do carry philosophical mileage, they may fail to cut ice with psychologists who tend to focus on jealousy as a broad dimension of temperament. The chapter reveals a disconcerting lack of cross-disciplinary work on jealousy: the sort of work that has moved the discourse on various other emotions forward in recent years. It explains how the best way to ameliorate this lacuna is, precisely, through an Aristotelian analysis, where jealousy is (perhaps counter-intuitively) accorded a place as a potentially virtuous emotion.

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

2010 ◽  
Vol 13 (03) ◽  
pp. 449-468 ◽  
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.

scholarly journals The Effects of Employee Stock Options on Credit Ratings

2008 ◽  
Vol 83 (5) ◽  
pp. 1273-1314 ◽  
Author(s):  
Yen-Jung Lee
Keyword(s):  
Stock Options ◽  
Credit Rating ◽  
Credit Ratings ◽  
Fair Value ◽  
Cash Flows ◽  
Share Repurchases ◽  
Credit Rating Agencies ◽  
Employee Stock Options ◽  
Rating Agencies ◽  
Unfavorable Effect

ABSTRACT: This paper examines whether outstanding employee stock options (ESOs), which represent the firm’s contractual obligation to deliver shares upon ESO exercise, affect firms’ credit ratings. I hypothesize that outstanding ESOs play two information roles—(1) suggesting equity infusion, and (2) predicting share repurchases—that help credit-rating agencies evaluate the issuing company’s debt service ability. Consistent with these hypothesized roles, results indicate that the present values of expected cash proceeds and tax benefits from ESO exercise have favorable effects on credit ratings. In contrast, the present value of the expected cost of ESO-related share repurchases has an unfavorable effect on credit ratings and this unfavorable effect is more pronounced for firms with a greater tendency to repurchase shares. The after-tax fair value of outstanding ESOs, which summarizes the effects of the above three ESO-related cash flows, is negatively associated with credit ratings. Taken together, these findings are consistent with credit-rating agencies incorporating the information conveyed by outstanding ESOs regarding potential equity infusion and ESO-related repurchases in their credit risk assessments and assigning lower credit ratings to firms with greater values of outstanding ESOs.

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

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

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Firms must currently apply the fair value method in determining the amount of employee compensation incurred in the case of employee stock options.<span style="mso-spacerun: yes;">&nbsp; </span>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&rsquo;s stock at its average market price of the earnings period.<span style="mso-spacerun: yes;">&nbsp; </span>These incremental shares increase the denominator for purposes of calculating diluted EPS.<span style="mso-spacerun: yes;">&nbsp; </span>These requirements are consistent across the pronouncements of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).<span style="mso-spacerun: yes;">&nbsp; </span>This study extends the work of Doran (2005) and Doran (2008).<span style="mso-spacerun: yes;">&nbsp; </span>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.<span style="mso-spacerun: yes;">&nbsp; </span>However, these previous works assumed that no shares were actually purchased for the treasury during the earnings period.<span style="mso-spacerun: yes;">&nbsp; </span>The FASB indicates one reason that the average for the period price is appropriate is because if treasury shares purchases were to occur, &ldquo;the shares would be purchased at various prices, not at the price at the end of the period.&rdquo;<span style="mso-spacerun: yes;">&nbsp; </span>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.<span style="mso-spacerun: yes;">&nbsp; </span>This paper employs a simple one period model that assumes a risk free environment with complete certainty.<span style="mso-spacerun: yes;">&nbsp; </span>The model allows comparison of computed EPS with an a priori known, correct amount.<span style="mso-spacerun: yes;">&nbsp; </span>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. <span style="mso-spacerun: yes;">&nbsp;</span>Correct diluted EPS is derived when the shares assumed purchased under the treasury stock method are acquired at the higher period ending market price.<span style="mso-spacerun: yes;">&nbsp; </span></span></span></p>

scholarly journals How discounts impact IPOs valuation performance and underpricing? A confrontation between warranted and unwarranted discounts

2021 ◽  
Vol 3 (1) ◽  
pp. 1-14
Author(s):  
Douaa Tizniti ◽  
◽  
Mohammed Rachid Aasri ◽  
Keyword(s):  
Regression Analysis ◽  
Market Efficiency ◽  
Small Sample Size ◽  
Intrinsic Value ◽  
Fair Value ◽  
Ordinary Least Squares ◽  
Small Sample ◽  
Least Squares Regression ◽  
Final Offer ◽  
Performance Results

Purpose: We investigated the different impacts warranted and unwarranted discounts have on IPOs valuation performance and underpricing. Research methodology: We used multivariate ordinary least squares regression analysis to examine discounts’ determinants, and their impacts on valuation errors and underpricing. We also used bias and accuracy errors to examine valuation performance. Results: We find both final offer price accuracy errors and underpricing negatively related to warranted discounts and positively related to unwarranted discounts. Additionally, warranted discounts are positively related to fair value estimate bias errors, contrarily to unwarranted discounts. Limitations: The relatively small sample size represents our study’s main limitation. Contribution: Unwarranted discounts allow assessing by issuers' underpricing level and underwriters’ sub-optimal efforts and investors' positive returns. Whereas warranted discounts allow issuers to avoid overpricing IPOs and communicate their intrinsic value, investors assess their negative returns, and underwriters reveal their superior qualitative valuation. Regulators can increase after-market efficiency and protect investors by implementing unwarranted discounts’ constraints and warranted discounts’ thresholds.

Expensing Stock Options: A Fair-Value Approach

CFA Digest ◽  
2004 ◽  
Vol 34 (2) ◽  
pp. 85-85
Author(s):  
William H. Sackley
Keyword(s):  
Stock Options ◽  
Fair Value

Discretionary Reporting of Stock Options by IPO Firms

2005 ◽  
Vol 19 (4) ◽  
pp. 223-236 ◽  
Author(s):  
Joseph D. Beams ◽  
Anthony J. Amoruso ◽  
Frederick M. Richardson
Keyword(s):  
Initial Public Offering ◽  
Stock Price ◽  
Stock Options ◽  
Peer Group ◽  
Price Volatility ◽  
Fair Value ◽  
Employee Stock Options ◽  
Public Companies ◽  
Option Values ◽  
Public Offering

The revision of SFAS No. 123 (SFAS No. 123R, FASB 2004) requires companies to recognize the fair value of employee stock options. In addition, nonpublic companies will no longer be permitted to assume stock price volatility of zero when calculating the fair value of their stock options. This study finds that the zero volatility assumption allowed under the original version of SFAS No. 123 (FASB 1995) resulted in an average estimated fair value of options that was $1.06 (40 percent) less than the fair value calculated using a peer group volatility estimate for firms undergoing an initial public offering (IPO). However, IPO firms that estimated their volatility underreported option values by an even larger magnitude than the group using the zero volatility assumption. Perhaps these firms reported a downward-biased estimate of volatility to inhibit analysts from computing option values using more reasonable volatility estimates. Contrary to the findings for public companies, we find that a large percentage of sample firms issued in-the-money options prior to going public. Following the IPO, only a small portion of firms issued in-the-money options. The concerns regarding recognizing option expense may be less important than the benefits of granting in-the-money options for IPO firms.

Sign in / Sign up

Export Citation Format

Share Document