Concepts for Analysis

ACC/423

March 12, 2013
Professor Farook Maya

Concepts for Analysis

(a) Major Recommendations of the stock-based compensation pronouncement.

Generally, the rule indicates that employee stock options be treated like all other types of compensation and that their value be included in financial statements as part of the costs of employee services. The rule requires that all types of stock options be recognized as compensation based on the fair value of the options. Fair value for public companies would be estimated using an option-pricing model. No adjustments after the grant date would be made for changes in the stock price—either up or down.

For both public and nonpublic companies, the value of the award would be charged to expense over the period in which employees provide the related service, which is generally considered the vesting period.

Expense is recognized over the service period with adjustment (reversal) of expense for options that do not vest, if employees do not meet the service requirement.

(b) The provisions of GAAP in this area differ from the bill introduced by members of Congress (Dreier and Eshoo)

According to Ciesielski’s commentary, the bill in Congress would only record expense for the options granted to the top five executives. They also are recommending that the SEC conduct further study of the issue and therefore delay the implementation of the new standard. From a comparability standpoint, it is highly unlikely that recording expense on only some options would result in useful information. It will be difficult to compare compensation costs (and income) for companies—some that use stock options extensively and some that pay their employees with cash.

(c)The bill in Congress urges the FASB to develop a rule that preserves, “The ability of companies to use this innovative tool to attract talented employees”

The FASB often hears that it should take a broader view, that it must consider the economic consequences of a new accounting standard. The FASB should not act, critics maintain, if a new accounting standard would have undesirable economic consequences. We have been told that the effects of accounting standards could cause lasting damage to American companies and their employees. Some have suggested, for example, that recording the liability for retiree health care or the costs for stock-based compensation will place U.S. companies at a competitive disadvantage. These critics suggest that because of accounting standards, companies may reduce benefits or move operations overseas to areas where workers do not demand the same benefits. These assertions are usually combined with statements about desirable goals, like providing retiree health care or creating employee incentives.

References

Retrieved from the University of Phoenix eBook

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2010). Intermediate accounting, (13th ed.). Hoboken, NJ: John Wiley & Sons. Retrieved from the University of Phoenix eBook