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This AICPA course is a must for CPAs whose business clients or employers have, or are considering, option plans, addressing SFAS No. 123 (R) in detail. This course explains how to estimate the value of options based upon fair value at the grant date addressing both public and nonpublic companies with examples and worksheets. This course also reviews SEC guidance on equity related disclosures including SAB 107, insider trading considerations and tax-related issues. Benchmarks from research and recent filing are provided.
Objectives:In this video, moderator Steven Balsam, Ph.D., CPA, Professor of Accounting and Merves Research Fellow of the Fox School of Business at Temple University in Philadelphia, PA, discusses share-based compensation with Terry Adamson, Vice President of Compensation Consulting at Aon Consulting in Radnor, PA; Christopher P. Bolash, Practice Fellow at the Financial Accounting Standards Board in Norwalk, CT; Francesco S. Froio, CPA, Senior Manager of Audit and Accounting Services of BMC in Paoli, PA; James G. Livingston, Ph.D., Vice President at Zions Bank in Salt Lake City, UT; Todd J. Russo, Attorney at Ballard Spahr Andrews & Ingersoll, LLP in Philadelphia, PA; and Peter G. Wollmeringer, Senior Manager of the Department of Professional Practice at KPMG LLP in New York, NY.
*(164-min. video) The DVD disk contains the video presentation and a viewable copy of the Manual.
**The Additional Manual is for group study training only. Unlike other formats, it has no exam
answer sheet and cannot be used to earn self-study credit.
Prerequisite: Basic understanding of accounting principles
732089
Chapter 1
Overview
Learning Objectives
This chapter has the following objectives:
Introduction
One would have to be a hermit not to have observed the controversy over stock options and stock-based compensation since 1984.
On April 28, 1994, Edward J. Markey, Chairman of the House Subcommittee on Telecommunications and Finance, wrote Arthur Levitt, Jr., Chairman of the Securities and Exchange Commission. His letter raised the question as to who is responsible for evaluating social and economic consequences of proposed accounting changes. Mr. Levitt's reply, dated May 25, 1994, reflects the SEC position announced in 1978: "While the potential economic impact of financial accounting standards should be assessed in the process of establishing new standards, the objective of providing useful information to investors should be overriding." These communications show the environment of the debate on the options project of the Financial Accounting Standards Board (FASB) and the reason, in part, that unprecedented attention was directed to the FASB deliberations.
Background
In correspondence associated with a presentation to the Senate Securities Subcommittee on October 21, 1993, concerning accounting for employee stock options, James J. Leisenring, the FASB's Vice Chairman, explained that this was the third time in the past 50 years that stock compensation was addressed by an accounting standard-setting body. While the FASB's predecessors agreed that stock options were compensation, debate had centered on how best to measure such compensation. The issues related primarily to the difference between traded options and employee options, with the latter being nontransferable, usually requiring vesting, and having terms generally longer than the usual traded options.
Historical Context
The rationale for adding stock options to the FASB's agenda in 1984 was that constituents including the American Institute of Certified Public Accountants (AICPA), the SEC, most of the major public accounting firms, and several corporations, asked the FASB to do so. Their concerns centered on the drastically different accounting that existed for substantially the same economic transfers. Note that other than fixed-at-the-money employee stock options at that point in time, all transactions involving the issue of equity instruments are recognized in the financial statements. Moreover, costs of compensation in the form of salaries, pensions, restricted stock, and health care benefits are also recognized in the financial statements. Indeed, since 1973, the value of a company's stock has been used to measure the cost of employee services that are acquired for restricted stock.
Exhibit 1-1 outlines the history of accounting for stock compensation from a standard-setting perspective through December 2004. Exhibit 1-2 gives the number of letters or commentators at various stages of the standard-setting process. This volume suggests the degree of interest in the agenda item.
APB Opinion No. 25: Intrinsic Value - Superseded by the Revision of FASB Statement No. 123
In 1972, the AICPA issued Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. It requires that compensation expense on the grant date of an option be the intrinsic value on the measurement date, i.e., stock price less exercise price. If the result of this difference is zero, no compensation expense ever gets recognized for the options. Note that even though market values exist for out-of-the-money options and warrants, demonstrating the economic value of an option to buy stock at a predetermined price during an extended period of time, APB Opinion No. 25 typically results in no reflection whatsoever in companies' financial accounting statements. This and subsequent relevant literature are outlined in Exhibit 1-3 and thereafter. Note that SFAS No. 123 (R) supersedes APB No. 25
In 1976, a survey of 449 companies showed that only 30 reported any compensation expense for options (AICPA Accounting Trends and Techniques, 31st Edition, 1977). This indicated the pervasive effect of APB Opinion No. 25: no compensation expense was typically recorded for stock options.
In December 1978, FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, was issued. Stock appreciation rights (SARs) tie compensation to future appreciation in stock price. For example, SARs issued when the stock price is $50 will yield $10 to holders of that SAR if the stock price increases to $60 and the holder chooses to exercise the SAR. FASB Interpretation No. 28 clarified that for stock appreciation rights and other variable stock option or award plans, compensation should be measured at the end of each period as the amount by which the quoted market value of the shares
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