The two internet articles given here are related to Statement 123(R) of FASB regarding share-based payment or stock compensation plans for employees. The standard issued by FASB required companies to record the cost of stock options offered to employees and replaces Opinion 25 which did not require recognition of compensation to employees in the form of stock as compensation.
The two internet articles are based on efforts of congresspersons David Dreier and Anna Eshoo to convince FASB and SEC to reconsider the standard and allow companies not to recognize the stock-based compensation costs and remove this cost from financial statements as companies would not be able to retain skilled and outstanding employees by offering cost-free stock options and financial statements would not help investors in evaluating the impact of stock options on share value.
The articles do not highlight the sections and provisions of the statement rather reflect the views and efforts in legislation regarding stock compensation plans. The two congresspersons in their bill propose that broad-based stock options for employees should be preserved and provide investors with important information in making decisions. The bill requires SEC to conduct a three-year study during which time no standards can be issued concerning stock options. The bill also requires the Secretary of Commerce to conduct a study on broad-based employee stock options and present a report regarding the impact of these stock options on various aspects of a company.
The major recommendations
The major recommendations set forth by FASB in Statement 123(R) are outlined as follows.
- Public companies should measure the cost of stock-based compensations through a fair value measurement approach and this cost should be duly recognized by the company. The costs of these stock options will have to be recorded during the period of service of an employee and the cost of stock options that do not have any relevant service related to them would not be recognized.
- The companies will be required to recognize stock-based options on fair value accounting measures but in cases where fair values cannot be estimated, costs will not be recognized on superficial assumptions.
- The fair values recognized for stock options will be continuously measured to evaluate any changes in the fair value. Any changes in the fair value of stock options will be recognized as compensation costs for the period the change occurs.
- Companies will use option pricing models where underlying market prices are not available for similar stock options. The option pricing models will be slightly adjusted to match the features of stock options.
- Additional tax benefits arising out of stock options will be recognized as an increase in the paid-in capital.
- The last recommendation or provision of the statement covers the disclosure of details of stock-based compensation plans and any specific details regarding stock options during a period in the notes to the financial statements for better understanding and decision-making by investors.
Differences between the proposed bill and the FASB statement
The bill presented by two congresspersons aims at preserving broad-based employee stock options and according to their view presents investors and shareholders with significant information to identify how stock options affect the value of shares.
The FASB statement on the other hand aims at recognizing and disclosing the cost of stock options offered as compensation to employees. The bill focuses on implementing the previous practice of offering stock options to employees and only disclosing the expense of stock options offered to top employees of the company. The statement on the other hand focuses on recognizing the cost of all stock options offered to employees based on market prices or option pricing models where market prices are not relevant. The basic difference then between the proposed bill and the FASB statement is the recognition of stock option costs and stock options being offered as compensation to services rendered to the company in a specific period.
The financial information produced by applying the recommendations and guidelines provided by the FASB statement is by far more useful than the information produced by applying the accounting procedures set out in the bill. FASB has highlighted that 750 public companies have already volunteered to implement statement 123 of the board and other companies should also implement the statement to remove the use of alternative accounting methods for accounting transactions of similar nature. The implementation of statement 123 also helps in convergence with standards set out by IASB related to stock options.
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, Connecticut 06856-5116
October 6, 2009
Re: The bill in Congress to preserve and implement broad-based stock options
Congressman David Dreier
United States Congress
Washington D. C
Dear Congressman Dreier,
The Financial Accounting Standards Board is quite pleased to see that you and your fellow congressperson have proposed a bill to preserve broad-based employee stock options and enhance information disclosed in financial statements to make this information more meaningful to investors. One of the main objectives of the board is to view public opinion related to accounting standards and implement any recommendations which may prove useful to investors, shareholders, companies, and accountants.
FASB issued statement 123 to remove concerns of financial statement users regarding the comparability of accounting practices related to stock options in various companies, the complexity of U.S GAAP, and convergence with International Accounting Standards. Statement 123 aims to remove any abnormalities which are caused by misinterpretations of stock options and values of stock options disclosed on financial statements.
The board realizes the fact that stock options are a necessary tool for retaining a good workforce but it should also be duly noted that recognizing stock options in exchange for services offered at cost increases the reliability and neutrality of financial statements. The neutrality of financial statements is an important factor that defines the way information is disclosed. Any biasness in recognizing, recording presenting financial information could result in wrong interpretations.
We can only achieve neutrality in financial statements of stock options of all employees whether they are key employees involved in upper management or employees working in other levels of business. The disclosure of stock options of key management employees on financial statements and that too on near to zero values could affect the financial reporting system quite adversely.